Municipal Bond Forum
Gauge tolerance risk
Q
I would be interested in your outlook on long-term Puerto Rico bonds, which are currently priced below par although they offer an attractive yield that may remain double tax-free.
A
James A. Klotz responds:
It is no secret that Puerto Rico faces some fiscal challenges today as well as in future years, but some analysts believe there may be reasons for optimism.
New Gov. Alejandro Garcia Padilla has vowed to bring Puerto Rico’s fiscal house in order and recently signed a pension reform bill into law.
Most Puerto Rico issues were downgraded by the rating agencies, which had a dampening effect on market values.
We don’t believe that Puerto Rico bonds are in danger of default anytime soon, but as Puerto Rico Treasury Secretary Melba Acosto Febo said, “We have a long way to go, but we are hopeful that we will soon begin to see the fruits of our efforts to eventually restore government finances and stimulate our economy.”
As for purchasing Puerto Rico bonds at this time, one must consider the reason they provide yields well in excess of other investment-grade bonds, and that prices will continue to be volatile due to ongoing “headline risk.” Individual investors must gauge their own risk tolerance when contemplating any investment.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.