Deutsche Bank Private Wealth: Small municipals, not states, a concern; investors should do research

By Andrea Heisinger

New York, July 13 - Much of the focus on the health of states' budgets is misplaced when it comes to the municipal bond market, Gary Pollack, managing director of Deutsche Bank Private Wealth Management, said during a reporter's breakfast in New York on Tuesday.

"It's ironic that state credits get all the headlines and notice," he said. "State governments have a balanced budget requirement and can push the problems down."

Most states have 5% municipal bond debt in their budgets, Pollack said, adding that he's "not concerned about state governments, even those with high CDS [high market prices to insure their debt with credit default swaps]."

There should be more worry about the "very small issuer."

"Small municipals are losing people and jobs and don't have the ability to pay debt or raise taxes."

Other sectors that are risky right now are health care and housing.

Among state governments, Illinois has replaced California as the "new example of malpractice for the muni market," Pollack said.

Illinois has been the largest issuer of muni bonds so far in 2010, he said, and the market is going to punish the state for that.

"They'll have to raise yields to entice buyers," Pollack said.

To end the breakfast, he gave some advice to those thinking of buying municipal bonds.

"Investors in munis have to do their homework and research who they're buying bonds from," he said. "You can't just buy blindly anymore. You can't rely on ratings."

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