Puerto Rico's muni-bond risk bears watching, BlackRock managers say

Puerto Rico's munis represent the 'fattest tail risk' in the market, managers at BlackRock warn. The worry? If investors smell default, a run on the tax-free bonds could break out.
MAR 17, 2013
By  JKEPHART
If you are looking for signs of cracks in the municipal-bond market, keep your eyes on Puerto Rico, not California. If the market were to begin anticipating a default of the U.S. territory's muni-bond funds, it could start a Meredith Whitney-like run on the tax-free bonds, top managers in BlackRock Inc.'s muni bond group said at a press conference in New York Thursday, referring to the founder of Meredith Whitney Advisory Group LLC. “Puerto Rico is the fattest tail risk in the muni market,” said BlackRock muni strategist Sean Carney. Even though the territory is relatively small and responsible for just $60 billion of the $3.7 trillion muni debt market, a default would have a big ripple effect because its bonds are widely owned by mutual funds and individual investors. “That would be a big deal,” said Peter Hayes, head of BlackRock's Municipal Bond Group. “There would be a rush to the exits and broad selling to get defensive.” But BlackRock isn't predicting a default for Puerto Rico, at least not now. “It would take a series of unexpected events to get to that point,” said Joe Pangallozzi, co-head of tax-backed muni credit research. Puerto Rico's troubles are nothing new. It entered a recession in 2006, while the U.S. economy was still happily humming along. It has yet to start growing again. For the 2013 fiscal year, Puerto Rico has a deficit of $2.5 billion, up from $1.6 billion for fiscal 2012, according to Moody's Investors Services. In December, Moody's downgraded Puerto Rico's general-obligation debt to Baa3, the lowest level above junk. Standard & Poor's followed suit last month. Puerto Rico's lawmakers are expected to vote this week on a pension reform bill that could lift some of the weight off its muni bonds.

Latest News

No succession plan? No worries. Just practice in place
No succession plan? No worries. Just practice in place

While industry statistics pointing to a succession crisis can cause alarm, advisor-owners should be free to consider a middle path between staying solo and catching the surging wave of M&A.

Research highlights growing need for personalized retirement solutions as investors age
Research highlights growing need for personalized retirement solutions as investors age

New joint research by T. Rowe Price, MIT, and Stanford University finds more diverse asset allocations among older participants.

Advisor moves: RIA Farther hails Q2 recruiting record, Raymond James nabs $300M team from Edward Jones
Advisor moves: RIA Farther hails Q2 recruiting record, Raymond James nabs $300M team from Edward Jones

With its asset pipeline bursting past $13 billion, Farther is looking to build more momentum with three new managing directors.

Insured Retirement Institute urges Labor Department to retain annuity safe harbor
Insured Retirement Institute urges Labor Department to retain annuity safe harbor

A Department of Labor proposal to scrap a regulatory provision under ERISA could create uncertainty for fiduciaries, the trade association argues.

LPL Financial sticking to its guns with retaining 90% of Commonwealth's financial advisors
LPL Financial sticking to its guns with retaining 90% of Commonwealth's financial advisors

"We continue to feel confident about our ability to capture 90%," LPL CEO Rich Steinmeier told analysts during the firm's 2nd quarter earnings call.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.