- Thursday, 04/11/2013
One of the truly unique features of the idiosyncratic municipal bond market is that the exempt nature of the income from issuers extends beyond what we know to be the 50 states. In fact, because the United States has territorial control over certain islands, they, in turn, have the ability to access the capital markets of the United States by issuing municipal securities which are exempt from federal as well as local income taxes for U.S. taxpayers.
We are most familiar with Puerto Rico as an issuer of municipal bonds, but there are two other issuers that, from time to time, gain the attention of investors for the reason mentioned above, as well as for potentially attractive yields that may augment a diversified portfolio structure. I am speaking of the U.S. Virgin Islands and Guam.
Although their combined presence in our five municipal bond ETFs currently only represents approximately one half of one percent of our holdings, bonds from the Virgin Islands and Guam have generally delivered exempt yields that are in line with those of certain Puerto Rico issuers. Their relative scarcity represents a potential store of value that I believe is recognized by the market as demand often far exceeding supply.
These relationships, a vestige of territorial colonialism, may provide certain economic benefits, albeit less significant than 100 years ago. While military considerations for the Caribbean were paramount in the United States’ acquisition of the Virgin Islands from Denmark, Guam is the one territory which still retains the imprimatur of strategic military positioning in the Pacific.
Guam has recently found its way into the press due to North Korea’s threats suggesting its own capability to launch a missile strike against the United States, with Guam located at the outer rim of its technology. None of this sabre rattling has had any impact upon the market for Guam’s bonds to date, and therefore has not yet impacted valuations.
I believe analysts will, of course, pay close attention to all aspects of this story, but the unquestioned military support for these territories may provide enhancement to credit quality.
Location of U.S Insular Areas
Source: U.S. Government. There are nine additional U.S. insular areas not listed on the map. The areas are: Navassa Island, Baker Island, Howland Island, Kingman Reef, Jarvis Island, Johnston Atoll, Midway Atoll, Palmyra Atoll and Wake Atoll.