Wall Street KOs Puerto Rico Bonds: Why You Should Care

Standard and Poor's delivered a blow against Puerto Rico's key bond grade today. The commonwealth's general obligation bond rating is now below Wall Street's version of the Mendoza Line. Why does this matter? Many investment funds' charters allow purchases of those securities that make the investment grade, so to speak. Considering that, according to a story in today's Financial Times, nearly seven of every ten municipal bond funds include Puerto Rican bonds, the market is poised for a Humpty Dumpty-style great fall.

The Puerto Rican general obligation bonds possess two virtues: they're triple tax-exempt and they offer high yields. In a one-percent or two-percent yield environment, Puerto Rico's nine percent-and-climbing annual reward delivers a powerful incentive to invest. Today's S&P announcement questions the island's ability to repay its debts.

For all the happy talk about the recession being over, we now face the reality of municipal bankruptcies and political entities that require serious financial restructuring. Detroit and a posse of mid-sized California cities have cried fiscal "uncle." Philadelphia, Puerto Rico, and Chicago are not far behind. (By the way, Puerto Rico, unlike Detroit, cannot declare Chapter 9 bankruptcy.) It's an ominous trend for Americans contemplating mid-term Congressional elections and a lame duck presidency.