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Regarding your article, “Moody's Downgrades Puerto Rico G.O. Debt”: Obviously the new law and downgrades are jolts to investment sanity after recent ups and downs. Puerto Rico has no revenue upside, their society has too many entitlements, etc. Do you envision them stopping payments on certain bonds or defaulting?
- R.B., Arkansas
It is very difficult to give you a definitive answer to your question.
The most likely scenario, in our opinion, would be a restructuring of one or more of the public companies to protect the General Obligation bonds.
It is encouraging that Moody's has just affirmed Assured Guaranty's rating.
Regarding your article Eye-Popping Yields Are Right Under Your Nose: Waiting and watching is exactly what to do. Rates will revert to the mean and many municipalities that are in debt may default. So unless the bonds are insured by a reliable insurance company, this is no time to put money in munis.- M.E., New York
We can’t help but wonder how long you have been waiting and watching. Most economists have been calling for higher interest rates for at least the past five years.
If you do the math, you will probably find that interest rates must rise to unrealistic heights to make up for the income investors have already sacrificed by waiting. The cost of waiting can be more substantial than most realize, and rates might stay low far longer than you think.
Although defaults in the muni market make up less than 1% of total issuance, we certainly have no quarrel with buying higher rated, insured bonds for an extra degree of security.
After I pass, how will my municipal bonds, held in a trust, be split among several beneficiaries? Are muni funds the better option?- R.F.
We have never been proponents of bond funds because unlike individual bonds, there is no stated maturity date and consequently no promise to return principal.
Distributing bonds from a trust to multiple beneficiaries does not pose a problem. It merely requires dividing the account, based on market value at the date of death.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.