What in the World Are Puerto Rican Bonds Doing in My Municipal Bond Fund?

The Puerto Rican bond default is a “slow motion train wreck” that has been occurring now for several years with Puerto Rico having publicly announced its intention not to pay its bond debt. Yet half of U.S. municipal bond mutual funds hold Puerto Rican bond debt, and the exposure of the top ten such mutual funds ranges from approximately 18% to 41%, according to an August 3, 2015 InvestmentNews article entitled “Puerto Rico’s uncertain future leaves muni bond fund investors in limbo.”

According to the article, the top ten U.S. municipal bond funds in terms of Peurto Rican bond exposure are as follows:

1. Franklin Double Tax-Free Income A (FPRTX) 41.15%
2. Oppenheimer Rochester MD Municipal A (ORMDX) 36.76%
3. Oppenheimer Rochester VA Municipal A (ORVAX) 34.89%
4. Oppenheimer Rochester Fund Municipals A (RMUNX) 23.22%
5. Oppenheimer Rochester Ltd Term NY Munis A (LTNYX) 21.14%
6. Oppenheimer Rochester Ltd Term Muni A (OPITX) 20.16%
7. Oppenheimer Rochester AZ Municipal A (ORAZX) 20.03%
8. Oppenheimer Rochester Michigan Muni A (ORMIX) 19.98%
9. Oppenheimer Rochester NC Municipal A (OPNCX) 18.91%
10. Oppenheimer Rochester NJ Municipal A (ONJAX) 18.51%.

Investors in tax-favored municipal bond funds are typically looking for a relatively safe source of income. However, Puerto Rican bonds are extremely speculative, high-risk investments, and municipal bond funds that hold a significant percentage of Puerto Rican bonds may be far more risky than investors were led to believe. Investors in Maryland, Virginia, New York, Arizona, Michigan, North Carolina, New Jersey, and presumably many other states may be surprised to learn that their supposedly home state-oriented municipal bond fund contains a significant percentage of high-risk Puerto Rican bonds.

It appears that these top ten muni bond funds have lost approximately 9% to 24% of their value since 2013. Such losses may be significant for investors looking for tax-favored income with conservative risk.

If you believe your bond fund may have lost value due to exposure to Puerto Rican bonds, we will analyze your portfolio and discuss your options at no cost to you.