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Puerto Rico has attracted some dismal headlines recently, but it also attracts some pretty wealthy individuals. Enticed by golden sandy beaches, swaying palm trees, oh and and the promise of a tax-free life.
For Swiss banking giant UBS, these islands have proved a lucrative hunting ground. UBS boasts that it manages the wealth of half of the island’s millionaires — roughly $10 billion. But all is not well in the tropical paradise.
According to a story in today’s New York Times UBS brokers have been encouraging clients to load up on highly leveraged Puerto Rican municipal bond funds run by UBS, with some brokers encouraging clients to borrow even more money to invest in those funds.
Many of these funds have since been hit hard as the island struggles with a weak economy, rising interest rates and outsize debt loads, forcing many to liquidate hundreds of millions of dollars in holdings in these funds to meet margin calls.
The bank says it has launched an internal investigation into the lending practices of some of its top-producing brokers in the commonwealth. At least one broker has been suspended after it emerged that he had encouraged his clients to buy securities on lines of credit, violating the bank’s policy.
I doubt many are feeling sorry for these individuals. But this is a lesson for all investors. In a bull market, leverage is your friend. But when the bull turns to a bear, it’s your worst enemy.
You can read the full article here.
Todays Other Top Stories
ETF Trends: – Muni bond ETFs: Redefine your muni core with intermediates. – Safe havens for investors are downright scary these days. Since Detroit’s record bankruptcy in July, investors have been more skittish than ever about municipal bonds, once a strong strand in the safety net of boring investments for Americans investors.
Bloomberg: – Texas fund’s first charter-school pledges buoy debt. – Texas public charter schools, the fastest-growing part of the state’s education system, are poised to see their bonds go to top grade from near junk as a $33 billion fund backed by oil revenue prepares to guarantee the securities for the first time.
4 Traders: – Buying muni bonds during this episode of congressional dysfunction could be a good time to capture better income. – The US government shuts down. What is the impact on the muni market? Jim Kochan, Chief fixed income strategist at Wells Fargo says. The impact will be minimal, particularly if it’s a short episode. But some people worry about federal grants to state and local governments. They may be delayed but eventually they’ll be made up. So in the broad scheme of things, this is not a particularly major event for the municipal bond market in my view.
Cate Long: – Puerto Rico’s moral hazard. – Will the Fed step in to put a floor under the trading of Puerto Rico debt? And if they do, how long would it be until Puerto Rico’s economic conditions support its debt service? The broader problem for Puerto Rico is that a large group of regular buyers have publicly stepped away from buying the bonds.
Learn Bonds: – “The great experiment” and what it means to bond investors. – This is a tough time to be investing in fixed-income securities. The reason for this is that the Federal Reserve has taken the financial markets into places it has never seen before. Thus, everybody is on “new” ground and everyone is just guessing about where the markets will go in the future. One can call current monetary policy the “Great Experiment” and market participants are just going to have to live with it!
The Federalist: – A primer on the municipal bond market. – Curious how municipal bond markets work? Cate Long’s primer on the municipal bond market might help.
Bloomberg: – Mint the premium bonds! – As Congress looks increasingly likely to force a default on U.S. government debt for no real reason, there are two possible approaches for a rational outside observer to take, which are (1) despair and (2) hare-brained scheming. Option 1 is probably correct, honestly, and you can get your fill of it elsewhere; Martin Wolf’s despair is eloquent. But Option 2 — coming up with creepy tricks to avoid reality, reality being the debt ceiling and a pointless default — is more fun so let’s talk about it here.
Bloomberg: – BofA says bonds to beat stocks in debt gridlock. – Strategists from Bank of America Corp. to Wells Fargo & Co. predict dollar-denominated corporate bonds will outperform stocks this month if political gridlock persists with the government partially shut down this week.
Bloomberg: – Goldman said to make $1.5 million error in Ford bond sale. – Goldman Sachs Group Inc. (GS) mistakenly added about $1.5 million of interest costs to a Ford Motor Co. (F) bond sale last week by using the wrong Treasury note as a benchmark for the security, according to two people with knowledge of the transaction.
FT: – U.S. corporate debt sales drop on government shutdown. – Corporate debt issuance is running at less than half the expected pace for October as the US government shutdown and looming debt ceiling deadline is pushing companies to the sidelines.
MarketWatch: – High yield bonds for retirement income? – For those that assumed credit risk before the financial crisis, they were taught a stern lesson, and for those that picked up exposure thereafter, high yield bonds have masqueraded as a relatively safe equity-alternative.
FT: – Fixed income set for doldrums. – Invesco Perpetual’s Paul Read, one of the most respected bond fund managers in the UK, has warned investors to keep their expectations low for bonds, in a dour client webcast this morning. He said it was “hard mathematically” to argue that bonds, particularly high yield, will deliver positive returns.
Bloomberg: – Play high yield during gov’t shutdown. – Nicholas Gartside CIO of International Fixed Income at JPMorgan Chase Bank, discusses the markets’ tempered reaction to the U.S. government shutdown and his subsequent investing strategy.
Shreveport times: – What to watch: Rising rates impact on bonds. – The top bond category for the quarter: junk-bond funds, which gained 2.16 percent.
FT: – New ways to invest in emerging market debt. – Emerging market (EM) debt investors are facing a challenge. Even before this year’s sell off in anticipation of higher rates in the developed world, the kinds of opportunities enjoyed by those who came early to the asset class had grown more scarce, and traditional top-down and bottom-up approaches were becoming less effective.
The Economist: – Perilous paper. – The rise of cat bonds and other “insurance-linked securities” is starting to affect the price of insurance, particularly on the reinsurance side. The inflow of money from capital markets has helped push reinsurance premiums down by 15% this year, denting profits in the sector. Some weathered insurance executives are warning that naive investors are distorting prices, creating a frothy “shadow insurance” sector with systemic implications.
FT: – What does the recent pick up mean for bond investors? – Bonds are driven by interest rates, so often do best when people don’t – cheering on the rising bond prices that accompany recession and redundancies is not the best way to make new mates.
Fox Business: – Why I’m bullish on stocks and steering clear of bonds. – In 2013 equity markets through the end of September advanced in most parts of the world to finish with an overall gain of over +15% as measured by the Global Dow (GDOW). The equity markets in Europe, Asia, North and South America all finished in the plus column. Right now I prefer to overweight stocks versus bonds.
Fox Business: – Should you be in bonds? – Janney Chief Fixed Income Strategist Guy LeBas talk about bond investing.
MarketWatch: – Fears the debt ceiling won’t get raised start appearing in bond markets. – Not many people really truly believe the U.S. will fail to raise the debt ceiling, thereby risking a default on its debt. But the doomsday scenario is certainly gathering interest as the government shutdown drama plays out in the gridlocked U.S. capital.
Credit Default Swaps show minimal US sovereign default concerns. 5yr US CDS up to 0.35%, just above 1yr average & well below 0.64% 2011 peak
— Anthony Valeri (@Anthony_Valeri) October 3, 2013
if the Fed was concerned about higher rates if they "tapered" they ought to do it now as the economy is slowing – bond yields would plummet
— Michael Pietronico (@MillerTabak) October 3, 2013