Puerto Rico Bonds Removed From Municipal Bond Index

Last Friday, January 31, the S&P National AMT-Free Municipal Bond Index removed a number of Puerto Rico bonds from inclusion in the index in response to possible ratings downgrades from Moody’s and the other major rating companies.  If the warned downgrades actually occur, this will push many Puerto Rico bonds into high risk, or “junk bond” status. 

The S&P National AMT-Free Municipal Bond index is only permitted to include high quality, low risk municipal bonds, commonly referred to as “investment grade.”  According to representatives of the fund, the recent losses and volatility in Puerto Rico bonds indicates that they are more high risk than the index is intended to contain, and the liquidity restrictions that many investors are currently facing with the bonds are also significant.  Between the two, the index determined that it could no longer include the Puerto Rico bonds.

This decision also comes on the heels of a report published on January 29th by UBS.  According to that report, UBS believes that one or more of the ratings agencies will downgrade Puerto Rico bonds to junk within the next month.  Such a move will undoubtedly drop bond prices even further.  In 2013, the bonds fell in value an average of 20.46%

Such a downgrade is also likely to force a number of other mutual funds to dump their Puerto Rico bonds, as the AMT-Free index has done.  Currently, around 70% of U.S. municipal bond funds hold some amount of Puerto Rico bonds.  If even a small portion of these funds are forced to offload their bonds as a result of a downgrade, it would result in a huge sell-off of bonds which have already suffered serious liquidity problems, with sellers far outnumbering buyers.  As a result, the mutual funds would likely be selling at huge discounts to get out of the Puerto Rico bonds, resulting in potentially large price drops for all bond holders.

Our team of attorneys is currently representing a number of investors in Puerto Rico and across the United States who have lost money in Puerto Rico bonds and bond funds holding Puerto Rico bonds, including those sold by UBS Financial Services of Puerto Rico.  Our team of attorneys and consultants has over 100 years of combined experience in the securities business and securities law.  Please contact us for a free, no obligation consultation if you have lost money in either Puerto Rico bonds or Puerto Rico bond funds.
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