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Muni Bond Fundamentals are 'Horrifying': Bond Manager

Tuesday, 15 Mar 2011 | 3:45 PM ET

After appearing on "The Strategy Session" Tuesday, David Albrycht, executive managing director and portfolio manger of Virtus Investment Partners, continued the discussion off-air with David Faber, on why the municipal market is in "shambles."

State hearing room
State hearing room

"Fundamentals are horrifying: unfunded pension liability [is] growing from $7 trillion this year to $11 trillion next year to $15 trillion in two years. Health care costs going up at 9 percent a year, inability to raise taxes ... headline risk is predominant," Albrycht said.

"You need to have aggressive reform, like we are seeing in New Jersey. You need to have governments dealing with the situation, like we're seeing in Wisconsin and Illinois," he added.

If over the next 24 months there is not pension reform, the munis are in trouble, Albrycht went on to say. "13 states right now ... are insolvent, they’re taking in less than they’re paying out. At the local level you’re seeing dramatic cuts."

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"My town for example, double A+ town, the average class size at the high school went from 16 to 27, they’ve gotten rid of garbage pick up, they’ve gotten rid of a lot of things that were taken for granted," he said.

However, if the worst does happen at the state level, the federal government will step in— similar to what happened with the auto industry, like Chrysler or GM, where contract law was thrown out the window, added Albrycht.

"Now if you think about who owns the municipal bond market right now, retail is wealthy individuals that bought munis for two reasons, tax-exempt income and the lack of credit risk," he said, adding, "unfortunately now since a lot of it is now focused in retail hands that is an emotional investor."

Municipal Bond Maze - See Complete Coverage
Municipal Bond Maze - See Complete Coverage

But, Albrycht does see opportunity as a tactical investor. "Even though our model calls for a 4 percent allocation, I am waiting for that event or the headline risk that will me an opportunity to get in at a level that is commiserate with the ultimate risk."

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