Market Views: Fixed Income
Puerto Rico's broken promise
We do not believe Puerto Rico’s recent default poses broader contagion risk to the municipal bonds market, but it marks the beginning of a long process to repair the country’s economy.
Puerto Rico defaulted on roughly $900 million in principal and interest due on July 1st, most of which was general obligation (GO) bonds and Commonwealth-guaranteed debt.
Despite this historic default, which is the first state or US territory to default since the State of Arkansas in 1933, the municipal market has taken it in its stride. In fact, prices of Puerto Rico bonds are generally flat (increasing by 3.4% since introduction of legislation in the US House; declining by 2.8% following the default).
While the default had been expected by the market for quite some time and risk premium priced in, we think this event marks only the beginning of a long process to restructure debt and repair Puerto Rico’s (also known as the Commonwealth) economy and fiscal house.