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While I agree with your article that the hype almost always exceeds the reality (“Embrace the Headlines”), there are thousands of bonds that are listed in default and several significant city defaults, like Detroit). This reveals that there is some rational basis for concern and to proceed with caution.- K.F., Ohio
There is always reason to proceed with caution because, as we said, all investments carry some degree of risk. Of course, perspective is valuable, too: According to Moody's and Standard & Poor's, less than one half of one percent of municipal bonds rated by these credit agencies have ever defaulted.
With the selloff of municipals, particularly those issued by Puerto Rico, there was been a reduction in the market value of individual bond portfolios. I think this is panic selling by bondholders fixated on the events in Detroit and Stockton. I don’t think these people belong in municipals in the first place. While no one wants the value of their portfolio to decline, this should not be a paramount consideration for bondholders, who get it all back upon redemption.- N.M., New Jersey
We couldn't agree more. This is the very definition of panic selling, not just from individual investors but also from institutions.
Unfortunately, the lower prices caused by these mass liquidations has a snowball effect which feeds upon itself and begets more selling, causing severe price deterioration.
Although we anticipate Puerto Rico bond prices will remain volatile over the near future, holders of individual bonds should continue to receive their timely interest and principal payments.
What is your view on the likelihood of Puerto Rico defaulting on any of its bonds - general obligation, highway and electric, etc.?
- R.Y., Connecticut
We see no likelihood of imminent default by any Puerto Rico issuing entity. However, until there are clear signs of fiscal improvement, we expect heightened price volatility to persist due to Puerto Rico's less-than-attractive financial condition and the headline hysteria effecting the trading of these securities.
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.