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Overview: Puerto Rico’s unique economy impacts investor returns

Phalguni Soni

William Dudley’s Puerto Rico update—economic and fiscal issues (Part 5 of 7)

(Continued from Part 4)

Puerto Rico’s economy

In the last section, we discussed some of the fiscal and economic issues facing Puerto Rico. In this section, we’ll compare some municipal bond exchange-traded funds (or ETFs) with returns for stocks and bonds.

Investor returns impact

High debt and unemployment, low economic growth, a low tax base, and unwieldy public corporations are some of the economic and fiscal problems affecting the performance of debt issued by the government of Puerto Rico. The S&P Municipal Bond Index has returned 6.82% over the past year, compared to -11.37% for the S&P Municipal Bond Puerto Rico Index. In comparison, the S&P Municipal Bond High Yield Diversified Index has returned 7.93%. Puerto Rico’s debt was downgraded to below investment-grade by all three major credit ratings agencies in February, 2014.

ETF return comparisons

Likewise, while municipal bonds have outperformed the S&P 500 Index and bonds with comparable ratings, Puerto Rico munis have under performed in comparison. Two high-yield bond ETFs, the Market Vectors High-Yield Municipal Index ETF (HYD) and the SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB), have returned 10.05% and 12.62%, respectively this year, compared to 6.19% for the iShares National AMT-Free Muni Bond ETF (MUB) and 4.79% for the SPDR S&P 500 ETF (SPY). The Vanguard Total Bond Market ETF (BND), which has holdings in investment-grade bonds, both corporate and Treasuries, has returned 3.75% over the same period (market returns up to May 31).

To read more about how municipal bonds have performed as an asset class, please read the Market Realist series, Geopolitical risks and the municipal bond investment opportunities.

William Dudley’s take on Puerto Rico’s debt

“Regarding the buildup of new public debt, the Commonwealth government has stated its intention that the general fund budget will be balanced in fiscal year 2015. This intention, together with the stance of not using deficit financing to support public corporations, should greatly limit the issuance of new debt.  The measures put in place during this year have already had some success in cutting the projected budget gap for the current fiscal year,” said New York Fed chief, Dr. William Dudley in a speech to the Certified Public Accountants of Puerto Rico, in San Juan, on June 24.

In the following section, we’ll discuss some of the steps Dr. Dudley advocated for the island to have a fiscally sustainable plan. Please continue reading the next section in this series.

 

Continue to Part 6

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