Despite the ongoing struggles facing Puerto Rico and the more recent downturn in the broader municipal bond market since the election, Cumberland Advisors continues to like insured bonds from the Commonwealth. Shaun Burgess, portfolio manager and fixed income analyst, writes Tuesday:
The municipal market has seen a vicious sell-off following the election of Donald Trump, as John Mousseau, Cumberland’s Director of Fixed Income, has documented in his quarterly commentary, “Tax-Free Municipal Bonds: Fourth-Quarter 2016 Review.” Insured Puerto Rico was not immune and has traded in sympathy with the rest of the municipal market. Yield spreads between insured Puerto Rico and similarly insured paper have tightened as a result. We still think insured Puerto Rico offers terrific value at yields of 4.75% or better.
He is also optimistic that new Governor Ricardo Rosselló of the New Progressive Party (NPP), elected in November, will be bond friendly. Burgess writes:
Mr. Rosselló seems capable and has accepted the task before him with fervor. He is seen by many as favorable to bondholders and as having an understanding of the importance of access to debt markets for Puerto Rico. He is also a supporter of statehood for the Commonwealth and has voiced his commitment to promoting that position.
After a tumultuous July, which saw Puerto Rico’s biggest default, and the passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the fourth quarter was quiet. Now investors need to see how reforms will take shape. Haircuts are expected. Burgess writes:
It will take time for the PROMESA-created Fiscal Control Board to get their feet underneath them and to sort out the complexities of the task before them. Although they have made some progress, substantive changes aren’t expected until at least the first half of 2017 or possibly later, depending on negotiations and litigation. The control board has announced it will start good-faith negotiations with creditors this week. Given the control board’s estimate that the Commonwealth will face a deficit of $67.5 billion over the next 10 years, haircuts should be expected across all authority debt.
Although he likes the insured paper, Burgess still says picking the right bonds is key. He concludes his commentary:
Cumberland Advisors’ Puerto Rico Insured strategy does not include uninsured debt from any island authority but focuses instead on the headline-driven opportunity in carefully selected insured debt. It is critical to examine the details of each bond indenture and the terms of each insurance contract. Blindly buying insured bonds is not a strategy we recommend.
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