Of all the wild, head-scratching moves in financial markets this year, there are few that have surprised investors quite as much as the rally in defaulted Puerto Rico bonds. “It just blows my mind,” says Matt Dalton, chief executive officer of Belle Haven Investments.
Since sinking to a mere 20.8 cents on the dollar in December, prices on the island’s most frequently traded securities have climbed steadily and reached a high of 45 cents last week before paring gains during the past few days. Not only are Puerto Rico’s bonds the top performer in the $3.9 trillion municipal market, they’ve gained more than any other dollar-denominated debt in the world, according to data compiled by Bloomberg.
The rally started inconspicuously enough back in late December, with a penny gain here and there that analysts chalked up to bottom fishing after prices collapsed in the aftermath of Hurricane Maria.
But then the increases started coming in bigger chunks as word spread that the island may emerge from the devastation with more money on hand than anticipated, a development that creditors bet would translate into better debt-restructuring terms.
The bonds soared by more than 8 cents over two days late last month after Governor Ricardo Rossello released a revised fiscal plan that projects a $6 billion surplus before debt payment through 2023, the second upward revision in as many months.
Many investors question the rally’s staying power. Puerto Rico has a long history of botching its projections, they point out. And the federal oversight board that was empowered by Congress to enforce fiscal discipline on the territory and chart a financial turnaround doesn’t appear to be nearly as sanguine as the bond market. On March 28, it demanded additional austerity measures that Rossello is resisting.
“We’re miles away from having a resolution and concrete determination on where we’re going to be,” said Dalton, whose firm invests some of the $7 billion it manages in insured Puerto Rico debt.
Municipal bankruptcies are so rare that trying to forecast how much investors will recover is little more than a guessing game. And there’s never been a workout as big or as complicated as the one under way for Puerto Rico, which has sold some $74 billion of debt with varying — and sometimes rival — claims to the government’s tax revenue.