Puerto Rico securities are widely held among pension and mutual funds, which have benefited from the bonds’ exemptions from municipal, state and federal taxes. FT notes that investors fear that should the change in Puerto Rican legislation ultimately lead to a wave of restructurings on the island it may weigh on the outlook for the wider muni market.
This comes as no surprise to EPJ Daily Alert subscribers, just over a year ago, on June 5, 2013, I wrote in the ALERT:
I have warned before about the municipal bond market. There are many improvised municipal bond explosive devices in the the $3.7 trillion U.S. municipal bond sector. It still may be a couple of years out before we see major problems such as Illinois, but only a few steps away is Puerto Rico's debt.This is no time to hold municipal bonds. There are major problems with a number of states and cities. It takes time for these crises to develop, but they will. Further, I my warnings on price inflation have intensified in recent weeks. Accelerating inflation will mean higher interest rates and thus put downward pressure on all bonds.Stay away from the bond market,especially the muni market. Puerto Rico is only the beginning.
Puerto Rican general obligation bonds are rated triple-B minus - the most risky investment-grade bonds in the market. The 5.0% coupon maturing in 2041 is trading approximately 25 basis points above the coupon rate. Bottom line: There is little fear in this market, despite the fact that number crunchers view Puerto Rico's financial situation to be worse than that of Greece. PR GOs should be trading hundreds of basis points higher.