In the week through July 9, investors pulled $790 million from muni funds, with the majority of assets coming out of long-term and high-yield debt, after Moody’s Investors Service cut Puerto Rico’s rating to B2, or five levels below investment-grade, on July 1 due to a new law allowing some companies to restructure their debt. Puerto Rico has issued $73 billion in debt, or about 2% of the munis market.
Some hedge funds and investors are seeing an opportunity after the sell-off. Eli Combs, president of MeehanCombs LP, argues that Puerto Rico bonds will rebound once the initial shock wears off.
“There’s fear that’s been injected by this change in the law,” Combs said in a separate Bloomberg article. “The reality, from our perspective as distressed-debt investors, is that the market tends to panic and then it tends to forget.”
The high-yield muni ETFs include a small allocation to Puerto Rican debt. HYD has a 4.3% in Puerto Rico and HYMB includes a 5.4% position in the commonwealth. HYD has a 10.5 year duration and a 5.13% 30-day SEC yield, or 8.5% taxable equivalent 30-day SEC yield. HYMB has a 9.17 year duration and a 4.66% 30-day SEC yield, or a 8.22% taxable equivalent yield.
For more information on the munis market, visit our municipal bonds category.
Max Chen contributed to this article. Tom Lydon’s clients own shares of HYD.