Focus on municipal bonds
Interview: Franklin Templeton Municipal Bond ---Costas, Raphael---Fund Manager
>> welcome back. a former charter kmagss executive has pleaded guilty to inflating subscriber numbers. david mccall entered his plea in a district court in st. louis today. he says he was instructed to meet certain quarterly expectations. he says he conspired with three others to inflate numbers report bid the cable television operator. charter is controlled by billionaire paul allen of microsoft fame. the company is not the target of a u.s. investigation. california bonds fell today, as you might expect, a day after standard & poor’s lowered the state’s credit rating. the rating was cut to bbb, two levels above junk, which is the riskiest credit category. several issues are swarming around the state of california, including lawmakers’ failure to pass a budget and fending recall election which may oust governor gray davis, all of which led to the downgrade by s&p. rafael costas is co-director of the $54.5 billion municipal bond department including the california municipal bond fund at franklyn templeton. he joins us from their office necessary san mateo, california. welcome.
>> thank you lane, how are you.
>> pretty well. that’s loot of money at stake you’ve got there for your investors there that are taking part in this, your customers. your reaction of s&p’s downgrade of california. were you surprised by the downgrade or the extent of the downgrade?
>> we were not necessarily surprised by the downgrade. there have been plenty of warnings.if you follow this story close enough and you know the business you know that they were about due for a downgrade. we were surprised about the severity of the downgrade. we thought a bbb plus would be more appropriate. but they have their own criteria and it is what it is. it has had some effect on the market. plet ti muted today was generally a flat day on the bond market and the california market sold off a little. i don’t think anywhere as much as people thought that it would be.
>> if you have a sense of what s&p was trying to say in making such a large move there? was there a message being sent specifically to california or to states across the country that are facing similar but not as serious issues right now with their budgets?
>> i think it is a broad statement but particularly for california, they have been on california for quite some time now about this crisis. it’s not the firm time we’ve gone through it. and i think they were telling them essentially you have to get this done or you are going to continue to see downgrades, which in fact translates into higher borrowing costs at retirement. we have a pretty heavy calendar of bore rosings in the future. it is a pretty material event for california and hopefully prodded the legislators to compromise over the weekend to come up with a plan they can vote on.
>> they seem to be some words that indicate that they are trying to get a compromise even more than they were last week. do you get that sense out there now? do you think there is a greater sense of urgency because of this downgrade to get something done pronto?
>> yeah, i think so. i don’t know if it’s all due to the downgrade but i think it certainly was a prod for this one event. apparently it is something now in the senate that hopefully is going to get voted on on sunday. after that it has to go before the full legislature. hopefully it is the beginning of the end of this issue.
>> have you done anything to change your position? are you buying or selling california paper right now?
>> well, our big fund is almost at its limit of 5% of any one position. so the 14.5 billion fund you talked about is pretty much full of california. but there are many other funds that we have in california, some national funds that are starting to look at buying california paper because it’s starting to make sense for even them to buy it outside. so we are a fixed income department. we run money for the long term, for the fixed income aspect, not the capital appreciation. when we see bonds trading this cheap historically, we’ve never seen california bonds trade this cheap compared to the insured scale, we want to take advantage of them and hold them to get morp income for our shareholders. it hasn’t changed our―go ahead.
>> how does this affect other california borrowers out there, that are not directly connected to the state; the local school districts, municipalities, utility authorities, water/sewer districts, these types? is this affecting them as well?
>> yes, unfortunately a lot of them have been suffering, guilt by association. again, if you know what you are doing in these markets, you know that a lot of these are offering especially good deals now, because a lot of these issuers that you talk about, like water and sewer departments, electric utility departments are pretty much stand-alone entities supported by your bills and mine that have nothing to do with what’s happening at the state. but the perception outside of the state and even within the state in terms of investors and what they read in the press tends to knock their value down in terms of price. but again, that offers a really good opportunity for us to invest at a higher than average yields.
>> a lot of people own municipal bond funds, mutual funds in particular, especially in high tax states like here in new york california, massachusetts, new jersey. what do you think the fallout from the california situation might be on the rest of the municipal bond market?
>> it shouldn’t really have any. all these states, of course, all fixed income really reacts to general economic trends at a national level and interest rates. but we all have those independent issues to deal with, like in california. new york has its own separate budget issues, new york city the same. massachusetts has had its problems, but they are pretty independent of each other. they are not―what happens in california is not really going to be affecting what’s happening in new york and the value of new york bonds. there are issues like supply also that come into play, that the other states might not be facing. so, no, we don’t expect and we don’t see any effect on other states just because of what’s apg in california.
>> rafael costas, thank you very much.
>> thank you, good weekend to you.
>> co-director of municipal bond department at franklyn templeton where they have billions at stake. recent data on u.s. factory orders for durable goods suggests companies are adding spark to an economic recovery that’s been carried by consumers. we’ll look ahead to next week’s reports and what you need to know to position yourselves right after this break. stay with us.
