The Standard & Poor’s Municipal Bond Puerto Rico Index fell 8.9% in August through Wednesday, on track for the worst monthly performance in at least 14 years.
If this decline persists through the end of the month, it would be worst monthly performance in the history of the index going back to December 1998, S&P vice president J.R. Rieger said. For the year so far the index is down 14.9%. If the current level were to hold to the end of the year, the performance would also be the worst since the index was founded, Rieger said.
The next worst yearly performance would be that of 2008, when the index was down 12.5%.
The index’s values are based on the coupons and prices of Puerto Rico municipal bonds on the secondary market, Rieger said.
After staying out of the bond market during the first half of 2013, the Puerto Rico Electric Power Authority successfully sold $673 million in bonds on Aug. 7. In a sign of investor confidence, there were over $1 billion in orders for the bonds, according to Municipal Market Advisors.
However, on Saturday, Aug. 24, Barron’s published a cover story that questioned the wisdom of holding Puerto Rico bonds. The story triggered a wave of selling on the secondary market.
While the bond prices were declining before the Barron’s story, most of the movement has taken place in the few days since, Rieger said on Thursday.
The story was misleading in its reporting of Puerto Rico’s debt per capita as being 10 times the average of the 50 states, the Government Development Bank of Puerto Rico said in a written statement. The Barron’s measure focused on commonwealth or state-level debt to the exclusion of federal-level debt. Since Puerto Ricans generally do not pay federal income taxes, they do not have to support federal debt service payments, the GDB wrote.
“In fact, total federal, state and local debt per capita in the [50] states for fiscal year 2011 was approximately $57,000, which is more than three times the public debt per capita in Puerto Rico,” acting GDB president José Pagán said.
“It is also important to note that the total debt of the commonwealth and its instrumentalities includes the debt of independent public corporations, such as the Puerto Rico Electric Power Authority and Puerto Rico Aqueduct and Sewer Authority, whose debt is payable solely from the entities’ own revenues,” the GDB said.
On Tuesday, Janney Capital Markets managing director Alan Schankel said, “the risk-reward proposition for Puerto Rico issues has improved significantly with 7% range yields comparing favorably to yields of other low investment grade issuers.”
