Thursday, October 31, 2013

High Risk, High Yield, Insured, Scary Bonds

Puerto Rico municipal bonds are at astonishing yields right now -- like >5% on bonds with maturities of less than five years.  And yet some of them have very high S&P and Moody's ratings, at least for the bonds that are insured.  (This means that if Puerto Rico defaults, bond holders are guaranteed to get their principal and interest from the insurer.  Of course, this assumes the insurer does not go under.)

Puerto Rico appears to be in very serious trouble.  The temptation is strong to buy a small quantity of these bonds, since at this point, short of going into default, the prices are unlikely to go much lower.  Yes, the insurer might go under.  But a ten mile asteroid might hit the Earth tomorrow, or worse, Obama might continue to destroy Western Civilization.

Curiously, even Puerto Rico bonds due in 2020 only have 9% yields, which suggests that the concern is primarily short-term.

1 comment:

  1. I suspect the yields are lower than one would expect because the Feds zero interest rate policy has broken the capital markets.

    All over the world, and in the US, there has been bidding up of asset values as people try very hard to get yield.

    This has led to a re-inflation of the housing bubble here in Phoenix (and other places). Of course, with bonds, more bidders equals lower interest rates.

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