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Q

Though there have been numerous articles on how the new government of Puerto Rico has made great strides in fixing its pension problem and operating budget, the ratings agencies refuse to increase their credit rating and seem to focus on the negative. Where do you think the bottom is on Puerto Rico bonds and how will their electric bond sale affect the market?

A

James A. Klotz responds:

Having been severely criticized for overrating the mortgage securities that precipitated the financial crisis in 2008, it is understandable that the rating agencies would subsequently err on the side of caution.

In their defense, we must point out that Puerto Rico is “addressing” their fiscal issues, but there is no guarantee of continued success or if current projections will be realized.

We do find it encouraging, however, that professional market participants have recently found these securities to be of greater value.
As we have written on many occasions, all investments contain a certain degree of risk. The higher yields on Puerto Rico bonds reflect this. They are not suitable for very conservative investors.

It is a fool’s errand to attempt to pick the top or bottom of any market. Remember, municipal bonds are purchased for income, not potential capital gains.

As a New York resident, a 5% tax-free yield can be comparable to as much as 10% on a taxable investment when factoring in the exemption from state and city taxes, as well as the 3.8% surtax under the Affordable Health Care Act.