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With the Puerto Rico Electric Power Authority coming to market with $675 million of revenue bonds offering 7.12% yield. Investors in search of high returns might be tempted to stick their toe in the tropical waters of the Puerto Rican bond market.
But Puerto Rico has come in for a lot of bad press lately as lawmakers of the self-governing commonwealth, attempt to get a handle on its budget deficit and take steps to bolster its pension shortfalls.
There are signs however that Puerto Rico is over the worst, legislators have reduced the budget deficit to its lowest level since 2009 and moved to trim pension costs, according to Joseph Rosenblum, director of municipal credit research at AllianceBernstein LP in New York.
Rosenblum told Bloomberg “They’re in a better position than January, they are certainly addressing many of the issues that were cited against them” by ratings companies, he said.
So is it time to take another look at Puerto Rico bonds?
A quick glance at their recent performance would suggest not. Puerto Rico securities lost about 5% in June, the worst performance since 2008. But that’s indicative of the muni sector as a whole, which lost 3%, according to Standard & Poor’s data. A direct result of the Fed’s taper shenanigans and Detroit’s record breaking bankruptcy.
The overall outlook for Puerto Rico is positive according to Michael Camarella, Vice President and Senior Portfolio Manager of OppenheimerFunds. Who told BusinessWeek. “Puerto Rico debt is a phenomenal opportunity, people are unaware of all the positives out of Puerto Rico and all they hear are the negative headlines.”
But with a jobless rate of 13.2% and GO ratings hovering just above junk status, Puerto Rico isn’t out of the woods yet. The three biggest U.S. credit ratings agencies have all warned they may downgrade ratings to junk status if things don’t improve.
However, if you’re in search of yield and willing to take the risk. Puerto Rico bonds are maybe, just maybe worth a punt. Just make sure you heed the advice of Tom Dalpiaz, a specialist in municipal bonds at Advisors Asset Management and keep maturities to three to four years on average.
Todays Other Top Bond Stories
Barron’s: – Goldman: Fed tapering to start in September. – The much-anticipated slowdown in the Federal Reserve’s monthly bond-buying program will begin in September, according to a Goldman Sachs economist. In a research note published today, Kris Dawsey cautioned that the decision to taper would depend on economic data.
ETF Trends: – ‘Fallen angel’ high-yield bond ETF: This ANGL has wings. – Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) has caught our attention after an abnormal price spike on Friday followed by a big jump in trading volume yesterday.
Learn Bonds: – The corporate bond market: Often misunderstood and under-appreciated. – This is the first article in a multipart series regarding corporate bonds. The end goal is to convey a much more accurate understanding of corporate bond default losses and what return you should expect on corporate bond investments. First, though, I will cover some more basic material to make certain that we better understand the corporate bond market.
The Telegraph: – Bank of America accused of fraud over $850m mortgage bonds. – The US government has accused Bank of America of civil fraud, saying the company failed to disclose risks and misled investors in its sale of $850m of mortgage bonds during 2008.
AllianceBernstein: – With rates going up, give bonds some credit. – Corporate bonds may provide both insulation and additional opportunities as fixed-income markets head into a new phase. Rising yields don’t affect all bond sectors the same way, and these differences can frequently be harnessed to investors’ benefit—notably in high-yield corporate bonds.
FT: – High yield ETFs survive ‘stress test’. – Exchange traded funds linked to the US high yield corporate bond market have passed an important “stress test” that should strengthen investors’ confidence in these instruments, according to analysts at Citi.
Bloomberg: – Computer trading in bonds won’t match stock level, McKinsey says. – The corporate bond market is unsuitable for full electronic trading, according to a study by McKinsey & Co. and Greenwich Associates, even as Goldman Sachs Group Inc. (GS) and BlackRock Inc. (BLK) expand their own systems.
Bloomberg: – Berkshire sells $1 billion of bonds in first offering since May. – Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) issued its first bonds in three months with a $1 billion, two-part offering.
Pension Funds Online: – Catastrophe bonds try to break new ground in pensions despite rift of opinion. – Pension funds can reap rewards from record issuance of catastrophe bonds, claims a new Clear Path Analysis study.
MoneyBeat: – European junk bonds look pretty again. – A month ago, the market for Europe’s riskiest debt looked on the verge of unraveling. Bond prices were sliding and investors were pulling money out of funds. A month later, the market is showing signs of hotting up again.
Forbes: – High Yield bond prices slide again, erasing July gains. – The average bid of U.S. high-yield flow-name bonds in the secondary market fell 67 bps over the past three sessions, to 101.02% of par, yielding 7.77%, on Aug. 6, from 101.69% of par, yielding 7.61% on Aug 1, according to LCD, a division of S&P Capital IQ.
The Telegraph: – Which bonds are still worth buying? – The bond bull market is over, many investors say. But others believe that pockets of value still exist – if you know where to look.
Star Tribune: – Know your way around muni bonds in a post-Detroit world; an opaque but largely stable market. – When Detroit became the biggest city in U.S. history to file for bankruptcy last month, it turned public attention to the municipal-bond market, where cities and states go to borrow money. Was this sleepy, often-overlooked area of the financial world actually dangerous?
Bloomberg: – Kellogg home is 2nd Michigan issuer to delay bond sale. – Battle Creek, home of Kellogg Co., became the second Michigan municipality to postpone a bond sale following Detroit’s record bankruptcy.
Only average 10-year note demand. Strong indirect demand but most other details on soft side.
— AnthonyValeri (@Anthony_Valeri) August 7, 2013