The story plot thickens for Puerto Rico bonds as Moody’s placed bonds issued from Puerto Rico under review for a possible downgrade to below investment grade. Selling pressure continues to mount impacting the market. The S&P Municipal Bond Puerto Rico Index has seen a negative total return of 19.45% year to date and the weighted average price of bonds in the index has fallen by over 24% this year. The weighted average yield (YTW) of bonds in the index ended at 7.26% or 419bps higher than investment grade bonds.
Investment grade municipal bonds tracked in the S&P National AMT-Free Municipal Bond Index have seen a negative 3.21% return year to date. Secondary trading in the muni market tends to get lighter before and after the holidays and it is still wrestling with a heavy new issue calendar.
Tobacco settlement municipal bonds also have been weaker. The S&P Municipal Bond Tobacco Index has declined by 8.96% year to date. The index tracks over $82billion in par value of tobacco settlement bonds. Yields on these bonds have risen 267bps over the course the year to end at 6.89%. These high yield, long duration bonds are impacted by both credit risk driven by declining tobacco use and the possibility of rising rates.