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By Miriam Sjoblom, CFA | 07-16-2009 01:43 PM

Downgrade Risk and Yield Opportunties in California

Franklin Templeton muni co-director Rafael Costas says some issuers within California are being unjustly punished over the budget concerns, which is creating yield opportunities for investors.

Securities mentioned in this video
FKTFX Franklin CA Tax-Free Income A

Sjoblom: Well, you mentioned the credit ratings, too, and it seems as if the market was pricing in expectation of downgrades. We did have, sure enough, Fitch come out, followed by Moody's, and downgrade the state. If you're not concerned about default risk, should people be concerned about downgrade risk? I suppose, what impact have the downgrades had on the market?

Costas: Well, clearly the lower-rated you are, the more you're going to pay in terms of interest costs. That's how the market works. That's how it should work. When something is this big and this public, the market is pretty good about anticipating, especially downgrades. I think the market seems to have already gotten there. What the rating agencies do in terms of getting to the BBB level will be just a formality at the time it happens. Once you get there, then the questions will begin to arise, "Well, what about going lower than BBB?" That will depend on what is happening in Sacramento.

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