Another round of financing problems in Puerto Rico could shake the municipal debt market and bond-related exchange traded funds.
According to the island’s Government Development Bank, the government could run out of cash by the end of September and could execute emergency measures, such as holding debt repayments, reports Edward Krudy for Reuters.
Specifically, the measures include reducing government spending, a moratorium on payment of debt services and debt adjustment for the Commonwealth, the GDB said.
“No matter how you slice it,” Peter Hayes, head of BlackRock’s municipal bond team, said on CNBC, “We think Puerto Rico’s problems will have a much wider negative impact on the municipality markets than previously thought.”
Potential problems with Puerto Rico’s debt could trigger volatility through the munis markets again, similar to what happened in 2013 and 2014 when conservative munis investors fled the market in response to a number of credit rating agency downgrades. Additionally, the risks would likely weigh on bond ETFs that track high-yield or more speculative-grade munis.
For instance, Puerto Rico makes up 3.0% of Market Vectors High Yield Municipal Index ETF (HYD) , 12.6% of SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB) and 4.6% of Market Vectors Short High-Yield Municipal Index ETF (SHYD) .
Year-to-date, HYD rose 1.7%, HYMB remained relatively unchanged and SHYD added 0.4%.
Many observers argue that the island will have to face defaults and restructuring debt.
“It’s an overlevered economy with too much debt. There are two ways to get out of that: economic growth or restructuring,” Hayes said in a Financial Times article. “I think there is a growing realisation in Puerto Rico that they have to restructure.”
Puerto Rico is tackling with a $72 billion debt load while the economy has been stagnating for the past nine years.
Market Vectors High Yield Municipal Index ETF
For more information on the munis market, visit our municipal bonds category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.