But make no mistake, the overall municipal market is on solid footing. Creditworthiness is strong and attractive relative yields should continue to draw demand for the asset class. The broad market notched negative returns in four of the past five months, but is up in July, notwithstanding Governor Padilla’s announcement.
We expect high yield funds could be most affected by events in Puerto Rico, as commonwealth debt makes up some 28 percent of the S&P High Yield Municipal Index. The potential for wider market disruption seems fairly muted, perhaps stemming only from investor overreaction to headlines. As such, Puerto Rico-related unease could produce value elsewhere in the market.
Even in Puerto Rico itself, all debt is not created equal. Some value could arise out of the melee. This points to the importance of thorough credit research to discern the differences between individual issuers and credits.
I invite you to read our monthly Municipal Market Update, credit commentaries and special reports for more insight on Puerto Rico and the broader municipal bond market.
Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog.