Puerto Rico was set to default on payments Monday, but fixed-income investors continue to pile into municipal bonds and related exchange traded funds, driving the market higher.
The commonwealth was expected to default on $422 million in Government Development Bank debt, but investors kept pouring more money into tax-exempt muni funds last week, reports Brian Chappatta for Bloomberg.
Munis have strengthened every month this year, only the second time this has occurred since 1999.
Over the past week, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which includes investment-grade intermediate duration munis, was up 0.1%, and the Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD), which tracks speculative-grade munis, including 2.1% in Puerto Rico, was 0.6% higher.
Year-to-date, MUB gained 1.9% and HYD increased 3.7%.
Supporting the muni market, S&P Globl Ratings has upgraded more localities than it has lowered for 13 consecutive quarters, the longest streak since 2001. S&P said it upgraded almost twice as many issuers as it downgraded int he fourth quarter of 2015. Fitch Ratings also said positive outlooks are the highest since at least 2001. Meanwhile, only nine issuers have defaulted in 2016 apart from Puerto Rico, compared to 24 over the same period last year.
[related_stories]While Puerto Rico experienced its largest default ever on Monday, fixed-income investors are treating the debt problems separately from the broader market.
“It was telegraphed,” John Miller, co-head of fixed income at Nuveen Asset Management, told Bloomberg. “It’s a continuation of an ongoing reality that they don’t have the revenues to meet all their budgetary expenses and pay debt service at the same time.”
Looking past the Puerto Rico woes, investors funneled $1.2 billion into muni funds for the week through April 27, the 30th straight week of asset growth and the largest of 2016. The inflows also came in after Moody’s Investor Service warned of the inevitable Puerto Rico default.
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iShares National AMT-Free Muni Bond ETF