Daily Money Tip: After Puerto Rico downgrade, what?
We wrote earlier this week about what investors expected if and when Puerto Rico's municipal debt was downgraded to "junk" status. Now that the downgrade has happened, what are bond investors doing to take advantage of the market weakness?
We wrote earlier this week about what investors expected if and when Puerto Rico's municipal debt was downgraded to "junk" status. Now that the downgrade has happened, what are bond investors doing to take advantage of the market weakness?
Dan Heckman, U.S. Bank Wealth Management's senior fixed-income strategist, says the firm's high-net-worth clients have been avoiding Puerto Rico for some time. But the Puerto Rico downgrade spooked a lot of bondholders and pushed prices down. That weakness in the muni bond market "could be a buying opportunity," Heckman said, but only for select issuers.
U.S. Bank Wealth Management maintains $115 billion in assets, and is based in Minneapolis. Heckman is based in Kansas City, Mo.
Now that the bad news has actually transpired, investors are bargain-hunting. For example, they bid up Puerto Rico's 5 percent general obligation bonds that mature in 2041. The bonds traded at 67 cents on the dollar Wednesday, up from 66.75 cents on Tuesday, according to the Municipal Securities Rulemaking Board's website.
The $837 million Market Vectors High-Yield Municipal Index ETF (symbol: HYD), which includes some Puerto Rico debt, was up about 1 percent on Wednesday.
Among muni bonds, what would Heckman buy? Not Pennsylvania, New Jersey, or Delaware, he said. Instead, his firm likes states such as Texas, Nebraska, Iowa, and "breadbasket" sections of the country with strong energy and agricultural industries. He also likes power plant and electric generators, and sticks with investment-grade muni bonds.
Puerto Rico has demographic and financial problems similar to Detroit: high unemployment, underfunded pensions, and residents fleeing in huge numbers. But Puerto Rico doesn't have the option of filing for Chapter 9 bankruptcy - as Detroit and Stockton, Calif., did recently.
"There probably won't be a U.S. government bailout" of Puerto Rico," Heckman added, but there could be a restructuring of current bonds, including, perhaps, a suspension of interest payments or new bonds issued at less-favorable terms.