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I would be interested in your outlook on long-term Puerto Rico bonds, which are currently priced below par although they offer an attractive yield that may remain double tax-free.
- R.C., Arizona
It is no secret that Puerto Rico faces some fiscal challenges today as well as in future years, but some analysts believe there may be reasons for optimism.
New Gov. Alejandro Garcia Padilla has vowed to bring Puerto Rico's fiscal house in order and recently signed a pension reform bill into law.
Most Puerto Rico issues were downgraded by the rating agencies, which had a dampening effect on market values.
We don't believe that Puerto Rico bonds are in danger of default anytime soon, but as Puerto Rico Treasury Secretary Melba Acosto Febo said, "We have a long way to go, but we are hopeful that we will soon begin to see the fruits of our efforts to eventually restore government finances and stimulate our economy."
As for purchasing Puerto Rico bonds at this time, one must consider the reason they provide yields well in excess of other investment-grade bonds, and that prices will continue to be volatile due to ongoing "headline risk." Individual investors must gauge their own risk tolerance when contemplating any investment.
Can you educate me about tax-exempt bond amortization? On a bond we bought years ago, we paid 108 per unit. When it came due, we got our 100 per unit back. I would have thought that I had an $8 capital loss because of the sale. But instead, through TEBA, I'm told that I have no such thing. Indeed, the cost basis is back at 100. Is there a relatively simple explanation as to why this is so?- J.H., Vermont
The reason a capital loss cannot be taken when premium bonds mature is they are purchased with the inherent understanding that they mature at 100.00.
Keep in mind however, when you buy premium bonds, by definition they produce more current income than par bonds and every dollar invested, including premium dollars, is working at the stated yields. Therefore, there is no loss incurred.
For more on premium bonds, please visit “The Smart Buy in Today’s Market.”
In light of recent bankruptcies in California, supposed experts have commented that other municipalities will find it less of a taboo. Isn't the real problem behind a bankrupted municipality its inability to borrow? Why isn't more being made of this point?
- G.W., Michigan
Despite media reports to the contrary, we don't expect other municipalities to follow Stockton's lead. Although bankruptcy may seemingly provide some immediate relief, the long-term consequences are too onerous to be taken lightly.
After three years, Vallejo, California, emerged from bankruptcy in November 2011. It has a much smaller city government and a notable shortage of services, including major reductions in firefighters and police. There has also been a migration of residents because, as Mayor Osby Davis said, "nobody wants to be from a bankrupt city."
As in the case of Vallejo, you can be certain that Stockton has sacrificed its ability to access the municipal bond market. It is not lost on other city managers and local officials that no investors or bond insurers will accept a general obligation pledge from a city that sought bankruptcy protection.
As for your insightful question on why more isn’t being made of this point: Sensationalism sells, with the saga of Meredith Whitney's prognostications a case in point. Attention-grabbing headlines are difficult to elicit from reporting that shows things will be status quo.
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.