Muni Fund Collapses To Record Lows As Puerto Rico Risk Rises

Tyler Durden's picture

Quietly behind the scenes and away from the exuberant stock market trading headlines of the mainstream media, Muni bond markets are in turmoil. Thanks to the 'shenanigans' in Puerto Rico - after lawmakers last month approved a bill allowing some public corporations to restructure debt - PR bonds have collapsed to record lows (and dragged a number of large Muni funds with them).

 

As Bloomberg's Michelle Kaske reports,

A Franklin Templeton Investments municipal-bond fund with the industry’s biggest allocation to Puerto Rico has sunk to the lowest in its 29-year history as prices on the struggling commonwealth’s debt set record lows.

 

The price per share of the $300.4 million Franklin Double Tax-Free Income Fund fell to $9.28 yesterday, the lowest since its inception in April 1985. The drop follows Moody’s three-step downgrade of Puerto Rico’s GOs last week to B2, five levels below investment grade.

 

Franklin’s fund directed about 69 percent of assets to Puerto Rico debt as of May 31, according to Franklin Templeton’s website.

 

...

 

Puerto Rico securities have traded at distressed levels for almost a year. Prices on some of the self-governing U.S. territory’s bonds sank even more after lawmakers last month approved a bill allowing some public corporations to restructure debt. The island’s securities have dropped for nine straight days, the longest slide since December, S&P Dow Jones Indices show.

 

Franklin Funds and Oppenheimer Rochester Funds are challenging the new law in a Puerto Rico court.

The Franklin Bond fund "is essentially acting like a Puerto Rico fund."

 

It seems the market is very concerned that this concern could spread. 12 of the Top 15 most viewed securities on Bloomberg are Puerto Rico bonds!

 

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It appears "reach for yield" has consequences after all - and remember how exuberant the market (stocks) were after PR managed to get that bond off earlier in the year?