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Moody’s Investors Service announced this morning that Puerto Rico’s general-obligation debt, may be cut to junk status, if the commonwealth’s finances continue to deteriorate and it isn’t able to secure access to credit markets.
Moody’s cited the island territory’s “weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy” in a statement on its decision. “These developments exacerbate the longstanding financial strain brought by the commonwealth’s very high debt load and pension obligations, as well as its chronic budget deficits.”
The decision is bad news for millions of mutual fund investors, Morningstar estimates that more than three-quarters of mutual funds that invest in municipal bonds are invested in Puerto Rico. Some of these funds are prohibited from owning junk rated debt by their prospectus and will be forced to sell if a rating cut does occur.
The problems facing Puerto Rico are well documented, for a primer you should read this report by Deutsche Asset and Wealth Management, which goes into some detail about the fiscal challenges Puerto Rico faces and discusses how investors should view bonds backed by various Puerto Rico issuers.
Institutional Investor: – Analysts say now is the time to buy municipal bonds. – Trepidation over quantitative easing and cities insolvency has led to depressed muni bond prices and bargains now.
Bloomberg: – Puerto Rico may be cut to junk by Moody’s on weak economy. – Puerto Rico’s general-obligation debt, already graded one step above junk, may be cut by Moody’s Investors Service if the commonwealth’s finances continue to deteriorate and it isn’t able to access credit markets soon.
Bond Buyer: – Budget agreement would hurt BABs. – Municipal bond market participants said the two-year budget agreement announced Tuesday evening by House and Senate Budget Committee leaders would extend by two years the cuts to the federal subsidy payments issuers receive for Build America Bonds and other direct-pay bond programs.
WSJ: – Beleaguered munis due for relief in 2014? – From Detroit to Puerto Rico, the municipal bond market is in turmoil. Still, many advisers are warning that now isn’t the time to start unloading tax-exempt debt.
ETF Trends: – Black Friday discounts on muni bonds. – The discounts at which municipal bond closed-end funds are currently trading are deeper now than when they briefly plumbed fresh lows back in early August 2011. They have continued to widen inexorably since early March of this year.
Learn Bonds: – How changing demographics are affecting the bond market. – We believe that changing demographics could create economic headwinds for as many decades as they provided tailwinds. This is not a pessimistic view, it is just reality. However, this does not mean that the U.S. economy will not grow, nor does it mean that equity markets will not perform well.
ETF Trends: – Cash rushes out of Treasury ETFs. – Government bond mutual funds are seeing record outflows after speculation on Fed tapering sent investors running, while alternative fixed-income exchange traded funds have been thrown into the limelight.
WSJ: – Treasury bonds rally; Demand for 3-year sale hits 10-month high. – Prices of U.S. Treasury bonds rallied for a second straight session, putting a lid on the benchmark yield’s ascent toward the 3% threshold. Foreign investors including Japanese scooped up bonds, attracted by yields near the highest in three months.
ETF Daily News: – Three ways to play rising rates with inverse Treasury ETFs. – The fixed income space has been out of investors’ favor for much of this year given the looming concerns of the Fed dialling back its easy monetary policy ever since late May.
Fortune: – What will tapering do to Treasuries? – Will tapering be a “sell the news” moment for 10-year yields? The pundits don’t seem to agree.
FT Alphaville: – The helicopter can drop money, gather bonds or just fly away. – Paul Krugman pointed out out in a recent post that whether a government finances itself through bond purchases, which are later bought by the Fed, or whether it prints money directly, makes no difference. The two are in effect the same. To help explain, we’ve done some balance sheet exercises to show how it is that the ultimate outcome of bond-funded spending, whether QE supported or pure money printing, is the same.
ETF Trends: – Corporate bond ETFs steady as issuance soars. – High-grade corporate bond exchange traded funds were slammed earlier this year as interest rates climbed amid speculation the Federal Reserve was close to tapering its quantitative easing program.
Income Investing: – Junk-bond returns top 7% for 2013. – 2013 will be remembered as a pretty terrible year for bonds in general, with the exception of one category: junk bonds. The average return across the high-yield market in 2013 to date just topped 7%, reaching 7.07%, per the latest reading on the Bank of America Merrill Lynch High Yield Master II Index.
IndexUniverse: – Clark: Pivoting between TLT and HYG. – This article is part of a regular series of thought-leadership pieces from some of the more-influential ETF strategists in the money management industry. Today’s article features K. Sean Clark, CFA, chief investment officer of Philadelphia-based Clark Capital Management.
Artemis: – EIOPA highlights concerns on ILS and catastrophe bonds. – You know a sector is gaining traction, experiencing growth, rising in profile and becoming more mainstream when the regulators express an interest. In 2013 it has been the turn of insurance-linked securities (ILS), catastrophe bonds and alternative reinsurance capital.
Reuters: – EU insurance watchdog highlights “cat” bond market risks. – A surge of new capital from investors like pension funds into the market for specialised insurance risks could threaten financial systems and needs to be closely watched, the European Union insurance watchdog EIOPA said on Thursday.
BBR: – Market vectors unveils emerging markets aggregate bond ETF. – Market Vectors ETFs has rolled out its latest ETF, Market Vectors Emerging Markets Aggregate Bond ETF (EMAG), which offers the most comprehensive exposure to emerging markets bonds.
Forbes: – How to view emerging markets now. – Although the sector has lost momentum, there’s no reason why the individual investor should bail out.
Financial Advisor: – U.S. mutual funds hit investors with big capital gains. – Capital gains pain has arrived for U.S. mutual fund investors. U.S. mutual funds are disclosing some whopper capital gains distributions, anywhere from 6 percent to 60 percent of net asset value, underscoring stock market success and a potential year-end tax headache for investors. The year-end distributions are among the largest seen since the start of the financial crisis in 2008, according to U.S. regulatory filings.
WSJ: – Long-term mutual fund outflows $1.59 billion in latest week. – Long-term mutual funds posted estimated outflows of $1.59 billion in the latest week as investors pulled money from bond and U.S. equity funds, according to the Investment Company Institute.
MarketConcensus: – Top 6 best bond funds | 2013 – 2014 corporate and government bonds investing. – A review of the top 6 best bond funds, corporate bonds and government bonds to invest in during 2013 and 2014.
NASDAQ: – New Year’s resolution: Rethink your traditional bond portfolio. – The end of the year is always a good time for reflection, and for thinking about what went well in our lives and what didn’t. From an investment perspective, one thing that fits in that latter category are investments in traditional bonds.
Investopedia: – Three ways to play bonds in 2014. – Investors in the fixed income sector are facing a big quandary. The end of the Federal Reserve’s quantitative easing programs. Enacted during the Great Recession, the Fed has been buying bonds- billions of dollars’ worth- every month in order to keep interest rates at low levels. Well, with the economy finally beginning to move forward in positive direction, the end or at least the slowdown of these QE programs could be at hand.
— PIMCO (@PIMCO) December 12, 2013
30-yr auction results a mixed bag. Soft domestic demand but indirect bids (incl foreign) strong. Dealer take below avg
— AnthonyValeri (@Anthony_Valeri) December 12, 2013
As I have said many times, Puerto Rico is one of the few true systemic risks in the muni market.
— Bond Girl (@munilass) December 12, 2013