To get the Best of the Bond Market delivered to your email daily click here.
Last week’s widely expected announcement that Puerto Rico’s credit rating had been cut to junk by Standard & Poors was compounded over the weekend when Moody’s Investor Services also cut the commonwealths credit rating. This second cut has many consequences for key Barclays municipal bond indexes, writes Bloomberg’s Brian Chappatta.
“Puerto Rico’s downgrade to junk by a second ratings company is set to realign $13 billion of debt in Barclays Plc (BARC) indexes that serve as benchmarks for most municipal mutual funds.”
“[Barclays'] broadest muni index requires that for issuers with three ratings, two must be investment grade. The U.S. commonwealth was cut to junk by Standard & Poor’s on Feb. 4 and by Moody’s Investors Service three days later. Puerto Rico bonds represent 2.5 percent of the $1.28 trillion Barclays benchmark, the bank said in a Feb. 4 report.”
Chappatta says that about $13 billion of Puerto Rico’s $70 billion in municipal debt could fall out of the index by the end of the month, adding that the muni market has been well ahead of the rating agencies in pricing Puerto Rico debt at junk levels.
How does all this affect you? Matt Fabian of Municipal Market Advisors told CNBC: “That passive ETFs will likely be forced to sell Puerto Rico municipal bonds, but that most mutual funds won’t be forced to sell. Instead, he said the biggest impact is that many mutual funds won’t be willing or able to buy Puerto Rico bonds in the future, which he said makes Puerto Rico more reliant on hedge funds and “a much thinner source of capital” than if it had fuller access to bond markets.”
Todays Other Top Stories
BondBuyer: – SEC examining muni ATS’, broker’s brokers for anti-competitive practices. – The Securities and Exchange Commission is examining the extent to which dealers using alternative trading systems and broker’s brokers are engaged in anti-competitive practices such as blocking or filtering out competitors from being able to bid on their municipal securities.
Reuters: – Louisiana to sell $500 mln in bonds; assures on oil spill costs. – New municipal bond issuance is set to fall to around $3.3 billion next week, with the state of Louisiana issuing an assurance on costs related to the 2010 oil spill in the Gulf of Mexico before a planned sale of nearly $500 million of state-backed debt.
WSJ: – Puerto Rico downgrade puts bond deal in spotlight. – Investors are looking beyond the junk-rated credit of Puerto Rico to whether the island can sell the debt that is needed to manage its short-term finances and lay groundwork for the government’s plan for economic recovery.
Cate Long: – EMMA is growing up. – Welcome to the new, user-friendly version of EMMA, muniland’s free central repository of bond documents, event disclosures, trade data and market statistics. It’s a treasure trove of muniland’s core information and it has been redesigned to be even easier to use and more intuitive.
BusinessWeek: – Ex-BofA executive pleads guilty to municipal-bond rigging. – Former Bank of America Corp. executive Phillip D. Murphy, accused of conspiring to defraud bond investors through a bid-rigging scheme, pleaded guilty in federal court in Charlotte, North Carolina, the government said.
LearnBonds: – Here’s one of the few compelling bond ideas still available today. – Thus far, 2014 has been a great one for investors who already owned bonds. Putting new money to work, however, has become more challenging. This is due to the fact that benchmark yields have fallen and corporate spreads have only widened slightly since the start of the year. Nevertheless, there are a few opportunities worth mentioning. One such opportunity is in the senior unsecured notes of Flextronics International Ltd.
Motley Fool: – Why floating-rate Treasuries won’t solve your income woes. – The Treasury recently issued its first floating-rate bonds, with variable interest rates tied to short-term rates. Despite interest from institutional investors, though, floating-rate Treasuries might not meet your needs as an income investment.
FT: – CDS outpace bonds in short-term markets. – Faced with an increasingly illiquid market for corporate bonds, investors are turning to a “shadow bond” market composed of derivatives linked to the performance of debt.
FT: – Taper time-bomb hits U.S. high-yield debt. – The global sell-off in risk assets is taking some of the shine off U.S. junk bonds after a multiyear rally that has kept yields on the securities near historical lows.
Forbes: – Weekly high yield bond issuance hits $6.3B; $31.8B YTD. – High yield bond issuance in the U.S. increased to $6.3 billion last week from $4 billion the previous week. With the recent activity, year-to-date issuance totaled $31.8 billion, down from the $35.5 billion at this point in 2013, according to S&P Capital IQ/LCD.
Reformed Broker: – Emerging markets: Here come the bulls. – The hottest topic this year so far is whether or not Emerging Markets stocks and bonds are a buy. After more than three years of massive underperformance versus developed markets and a huge disparity in valuation, is now the time to get excited about the foreign investments that no one else will touch?
Businessweek: – Coutts says emerging-market crisis ’talk’ as wealthy buy. – Coutts & Co., the wealth management unit of Royal Bank of Scotland Group Plc (RBS), said it doesn’t see a crisis in emerging markets and the firm’s rich clients are taking advantage of this year’s declines to boost holdings.
NYT: – Minimizing the tax drag on your investments. – Unless you happen to be a certified public accountant, or related to one, the topic of taxes you pay on your investments probably has as much appeal as a root canal. Understood. Nonetheless, it’s a topic well worth focusing on.
Yahoo Finance: – The ‘Great Un-Rotation’: Investors rush out of stocks, into bonds after tough January. – January was a rough month for the U.S. stock market, a terrible one for emerging markets and good for bonds. Like moths to a flame, mutual fund investors responded accordingly, taking a record amount of money out stocks and moving much of it into bonds.
Boulder County Business: – Is Obama’s new myRA a good deal for savers? – In his State of the Union speech, President Obama unveiled a new myRA account for savers. Introduced as a novel way to save for retirement, the myRA “guarantees a decent return with no risk of losing what you put in.”
MarketWatch: – Why mutual funds beat Obama’s myRA plan. – There are a few problems with President Obama’s new retirement savings program, the myRA, but the biggest one may be that Americans have been able for years to get nearly everything it offers, but haven’t been doing it.
Gross: Say what? House to follow #Yellen testimony with another panel of “witnesses” to react to Yellen. Unheard of !
— PIMCO (@PIMCO) February 10, 2014
JUST IN: RBC Says Caribbean Business Puerto Rico Report Is “Factually Inaccurate And Was Not Verified With Us.”
— Brian Chappatta (@BChappatta) February 10, 2014
— Cate Long (@cate_long) February 10, 2014
“Bond Squad is my favorite bond investing newsletter. It combines common sense with deep market knowledge.”
- Marc Prosser, Publisher of Learn Bonds
Bond Squad is more than just an investment newsletter! Paying subscribers can call-up bond market veteran trader and portfolio manager, Tom Byrne, for market advice and have him review their portfolio free of charge.
Get a free two-week, no commitment trial of Bond Squad by emailing Tom at firstname.lastname@example.org
Or learn more about Bond Squad’s clearly written, expert analysis, click here