Defaulting on bond payments isn’t just for Europe anymore. Detroit and several cities in California have defaulted on bond payments. Now Puerto Rico may be in trouble, as its bonds are trading as if they are going to default.
This week, the yield on Puerto Rico’s general obligation bonds (PR G.O.) pushed up over 10%. That led the Government Development Bank on Tuesday to announce that it would scale back bond sales for the rest of 2013.
Puerto Rico’s bonds offer a double tax advantage, which should help hold their yield down. Yet when considered on a tax-equivalent basis, PR G.O. yields this week exceeded CCC corporate yields, based on the Merrill CCC Index YTW.
Puerto Rico’s junk bond status reflects a weak economy, but it also signals that the island is in deep financial trouble. And the problems extend beyond Puerto Rico, given that it is part of a growing list of state and local governments with financial troubles.