Colby is Portfolio Manager/Municipal Bond ETFs with more than 30 years of fixed income experience.
It is difficult, I believe, to imagine that there is an investor who has no opinion on recent events affecting the Commonwealth of Puerto Rico. The actions recently taken by the three leading bond rating agencies to move the ratings of certain Puerto Rico issues to below investment grade have created a firestorm of commentary and angst over the possibility that Puerto Rico, the ninth largest issuer of tax-exempt municipal bonds, might default on its payment obligations.
Source: Van Eck Global Research using data compiled by Bloomberg. As of February 13, 2014.
As has been thoroughly reported, a good number of municipal bond mutual funds and ETFs across the country have (or had) exposure to many of the Commonwealth's issues of triple tax-exempt bonds (federal, state, and local levels of taxation), going into this current crisis1. Selling by wealth managers began in earnest last summer and only exacerbated the downward spiral of valuations, putting greater pressure on the island to seek to maintain a foothold in the capital markets. Significantly, S&P has mandated, as a condition of Puerto Rico's avoiding further erosion of its BB+ credit rating, that it raise capital in the bond markets, which it plans to do in the next few weeks.
Despite all of this, I offer these observations: since Moody's joined S&P to drop the credit of Puerto Rico to below investment grade, there has been no diminution in the trading of its bonds. Yes, there have been sellers, but there have also been buyers. Several dealers have reported daily trade activity in the hundreds, representing $20 million to $30 million in nominal value. It has also been reported that certain very large and opportunistic money managers are building large positions in Puerto Rico bonds, which may provide the liquidity the market needs. This may be suggestive of an oversold market, and a chance, perhaps, to position accordingly, given some expectations for recovery. Whatever the outcome, it remains important to note that below investment-grade ratings do not mean imminent default. We should consider these factors as important markers in this evolving narrative.
1Source: Bloomberg Brief Newsletter. As of February 10, 2014. "Puerto Rico Cut Means Realignment for Indexes."
The Market Vectors High-Yield, Short High-Yield, Long, Intermediate, and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks, including economic, political, regulatory or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.
IMPORTANT MUNI NATION® DISCLOSURE
Van Eck Global does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.
Please note this post represents the views of the author and these views may change at any time and from time to time. MUNI NATION is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation.
All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.
Any discussion of specific securities mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities.
Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333. Please read the prospectus and summary prospectus carefully before investing.
Van Eck Securities Corporation, Distributor
666 Third Avenue
New York, NY 10017
Munis: Municipals in 2016
Munis: Potential Puerto Rico Defaults and Reserve Draws
Munis: Go Long for Rising Rates: Just the Facts - Part 2
Munis: Why Duration Matters
Munis: Just the Facts - Part 1
Munis: “Fed” and Fed Up?
Munis: A Better Road for Tomorrow
Munis: Value Seen in Muni Bond Closed-End Funds
Munis: Video Viewpoint with Colby
Munis: Back to Fundamentals
Munis: Stirred, Not Shaken
Munis: Summer of Discontent
Munis: No Summer Doldrums
Munis: Value in Municipal Closed-End Funds?
Munis: Halftime Perspective
Munis: Puerto Rico at a Crossroads
Munis: Infrastructure, All Talk?
Munis: 2Q'15 - No June Swoon But Finish Strong?
Munis: Talking Points on Chicago Downgrade
Munis: Update on the Commonwealth
666 Third Avenue
New York, NY 10017
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.