Reuters and others have reported on the recent rally in Puerto Rico bonds.
The S&P Municipal Bond Puerto Rico Index is up 4.94 percent so far this year, with most of that increase happening in February. That same index fell more than 20 percent in 2013, when net outflows in Puerto Rico-oriented funds totaled $20.2 billion, or 28 percent of $83.4 billion in assets under management, according to Lipper data.
The primary spur for the February rally in Puerto Rico bonds was the investor call held by the Government Development Bank on February 18. The GDB had held its previous investor call on October 15, 2013 and it hadn’t issued any financial information in the four months between calls. Investors were starved for information aside from the monthly Economic Activity Index data issued by the GDB.
Looking back over my previous writing, another big movement in Puerto Rico bond prices caught my attention. This was the violent 40 percent spread widening of Puerto Rico general obligation bonds that happened between August 28 and September 3 last year:
The late August spike in yields dwarfs the recent rally. Was there an unknown credit event for Puerto Rico in late August? Actually that is when Puerto Rico did a massive amount of borrowing, mostly away from the public markets (only the August 29 highway deal was done as a public offering).
In the three-week period after the Puerto Rico borrowed at least $1.34 billion, the commonwealth’s spreads blew out 40 percent. I assume that some investors that were privy to those deals had up-to-date financials. Since it’s difficult to short bonds in muniland, I assume that investors either dumped their current holdings to invest in the new offerings or didn’t like what they saw on Puerto Rico’s financial statements and sold their holdings to reduce exposure. The price moves of late August to early September dwarf the recent February rally in size.