Puerto Rico is Why You Should Stay Away From Municipal Bonds
I have never understood why anyone would want to loan money to a city or state that is in heavy debt. When you invest into a municipal bond that is exactly what you are doing. We think that our federal government is poorly run. Investors don’t even stop to think how bad and corrupt it is at the state level.
Puerto Rico, who is knocking on the door of financial insolvency, is in debt by 72 billion dollars and quickly running out of money. They aren’t afforded the option of Chapter 9 bankruptcy. However, to make the problem go away, Congress is trying to change that and the individual investor will take the loss once that happens.
Yes, Congress has a fall guy when it comes to state debt. Think about how this has unfolded. First, interest rates are driven down so low that investors are going to markets such as the muni bond markets for higher interest bearing investments. They should be safe right? After all it is the promise to pay by states that is important. So, in effect, the politicians left the states financial irresponsibility up to the individual investors to bail out. Now, they are voting to allow the individual investor to take the loss. That all works out real nice.
It is another bail-out. Not at the expense of the taxpayer but at the expense of the investor. If you go and look at what muni bonds are for sale, you will see the highest paying ones are for Puerto Rico and for the State of Illinois which is just as bad. So, Puerto Rico goes first. Then it will be ok for the State of Illinois to go next. Maybe California will be next. Let’s reward these states for the financial corruption and irresponsibility.
The irony is that it is our very own irresponsible politicians that are working to allow this to happen.
The problem is once the nuclear option of bankruptcy goes into effect, the investors have no legal options for protection. They are wronged by the very system that was supposed to honor their investment.
SO, Congress set up the individual investor for the fall. That is genius. After all, they didn’t want to have to pay for the problem.
Careful what you wish for politicians. This could have a huge ripple effect across the entire muni bond market driving up borrowing costs, driving down muni bond prices, and greatly effecting every state that needs to borrow money. Of course, that is just what they do. Politicians messing up markets.
Bob Brooks is host of The Prudent Money Radio Show, Financial Advisor, and active money manager that consults and helps people plan.