Broad Brush Paints Munis Red

Eric Jacobson: Hi, I am Eric Jacobson, fixed-income specialist with Morningstar. We are here today at Eaton Vance with Tom Metzold, a long time municipal bond fund manager at Eaton Vance. Tom, thank so much for joining us.

Tom Metzold: Thanks for having me

Eric Jacobson: So Tom, this financial crisis has certainly been rough for a lot of sectors but the muni market in particular, I know its been a real challenging time for you. So maybe talk a little bit about you know how you are responding right now in your portfolios and you know what your day to day work looks like given the situation?

Tom Metzold: Certainly. As you said this crisis has been absolutely unprecedented, in 21 years in the business there has never been anything quite like this. As a relative value investor we find that municipals have underperformed more than any other asset class relative to treasuries in our opinion, to the point that in normal times municipals yield somewhere around 85% or 90% of long treasuries, in there 180% or 190% and we have continued to try to take advantage of that but the market has continued to penalize us by taking yields higher and higher in the municipal market and taking yields lower and lower in the treasury market.

Eric Jacobson: In terms of parts of the market, is there much differentiation going on right now? Whether its you know I leave the question open to you but you know I mean my question to be asking about sectors, quality, maturity things like that has a lot of differentiation where the market is reacting?

Tom Metzold: Unfortunately there is absolutely no differentiation between sectors, between insured, uninsured rating classes. The market is painting everything with the same broad brush and as result relative value investing is truly out of favor.

So as we have done in the past we have tried to trade out of lower quality bonds into higher quality bonds but in fact have been penalized for that because the insurers have gotten downgraded and people are penalizing bonds with insurance and taking their prices down more than bonds without insurance.

Eric Jacobson: Wow, so its obviously been quite a rough time. If you put aside that the fact that the market today is not differentiating very well, you know what are the areas that as you do this you trade as you said you sort of trade up in quality. Are there particular areas or is it just straight, just a quality call across the board, are there particular areas that you think you know when things get somewhere back to normal that you think will help you know lift the tide for you a little bit.

Tom Metzold: I believe people are going to eventuality recognize and realize that bonds that have AA underling credit qualities that have insurance from MBIA, Ambac, even FGIC should not be penalized. Those bonds will rally the most because bonds should trade to their underline value and not be penalized for something that should have value. Insurance can only have a positive value not a negative value yet currently the market is assigning a negative value. We have actually moved a lot of our portfolio into those bond and we believe ultimately we are going to get back a lot of what we have absorbed on the downside

Eric Jacobson: Well good, I wish you well with it and I really do appreciate you taking the time talk to us this morning.

Tom Metzold: Thank you very much

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