Puerto Rico is poised to default on about $400 million worth of Government Development Bank debt as of the close of trading on Monday, marking the third time in less than a year that the U.S. territory has missed a debt payment. But as dramatic as that news is for the island, it’s having little impact on the broader U.S. muni market, whose assets total $3.7 trillion.
“What’s happening in Puerto Rico is staying in Puerto Rico,” says Matt Fabian, partner at Municipal Market Analytics, an independent research firm. At least for now.
That’s because many institutional investors and mutual funds have sold much of their holdings and those still holding Puerto Rican debt have had some expectation of default.
John Miller, co-head of fixed income at Nuveen Asset Management, told Bloomberg Radio on Monday that because of the deteriorating economic situation in Puerto Rico his firm has reduced its Puerto Rican holdings to near zero, and any remaining Puerto Rican bonds it owns are insured.
But not all mutual funds have unloaded their Puerto Rican debt holdings. The Franklin Double Tax-Free Income Fund and several Oppenheimer municipal bond funds still hold large percentages of assets in Puerto Rican muni bonds.
“What we’re really worried about now is economic decline actually accelerating because in part the Government Development Bank is impaired,” said Miller. And that could increase the odds that Puerto Rico defaults on $2 billion worth of general obligation debt due July 1.
Puerto Rico’s economy is in bad shape, having endured a recession for almost 10 years. The island has an unemployment rate near 12% — more than twice the rate for the U.S. – and has been losing population for the past five years. At the same time it has $70 billion in debt, more than any U.S. state except New York and California.
Puerto Rico doesn’t have “the revenues to meet all its budgetary expenses and pay debt services at the same time,” said Miller.