Tuesday, July 8, 2014

What You Need to Know About the Developing Crisis in the Puerto Rican Muni Bond Market

A move by Puerto Rico to allow some public companies to restructure their debt last month sparked a credit downgrade, and brought a rally in debt sold by the US commonwealth to a halt.

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.

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.
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.


1 comment:

  1. Puerto Rico is an insolvent sovereign and has neither investment seigniorage nor fiscal seigniorage; it is a candidate for bondholders to literally own the electricity and water infrastructure and charge whatever rates they may for essential public services.

    Without access to credit, Puerto Ricans may come to be beholding to the sovereignty of investment funds such as Franklin Templeton and OppenheimerFunds, for the essentials of life. Most assuredly these people will be living out their lives in perpetual debt servitude.

    A new paradigm is emerging. Liberalism is giving way to authoritarianism. Under liberalism bankers, corporations, government, entrepreneurs, and citizens of democracies were the legislators of economic value and the legislators of economic life that shape one’s means and one’s ends. Now under authoritarianism, currency traders, bond vigilantes, bond traders, and regional fascists working in public private partnerships and in regional governance, are the legislators of economic value and are the legislators that shape one’s means and one’s ends.

    Those living in Detroit are no far behind as Muhammad Khan and Shannon Jones post in WSWS Detroit Residents And Water Workers Speak Out Against Water Shutoffs. The city of Detroit is racing ahead with its plans to shut off water to some 150,000 families who cannot afford to pay their water bills.