It is time to pay attention to Puerto Rico muni bonds*

*Even if your clients do not own Puerto Rico municipal bonds.

Dec 2 15 1Are you prepared?

If you have tuned out all of the news updates about Puerto Rico’s municipal bond and finance problems, it is time to tune in again.

There is speculation of an increased risk of a default by the Commonwealth on December 1. If that happens, there will be headlines in every periodical, and the stories will include the words “municipal bonds” and “default.”

If you have muni bond clients who read those stories, you should be prepared for their questions, should they call you:

  • What does this mean for my municipal bonds?
  • Should I be selling my muni bonds? Should I be buying?
  • What does this mean for the rest of the municipal bond market?
  • How will this affect my muni bond mutual funds? (Or ETFs?)

For clients who may already be uncomfortable with the bond market generally or the muni bond market specifically, headlines like this could provide a distorted impression of the market-at-large. We can all hope that there is not a default on December 1, but advisors would be wise to be prepared for well-informed conversations should it happen.

Keep in mind that by December 2, there will only be a few full trading days left in the year, so secondary market liquidity may be reduced and volatility could be heightened–raising the risk of an emotional (that is, less than rational) response from investors which could add to volatility.

Be Prepared:

Identify which of your clients own Puerto Rico bonds. Are any of them un-insured?

Review municipal bond mutual fund holdings for exposure to un-insured Puerto Rico bonds. What are those managers saying about their funds and Puerto Rico exposure?

If your clients use municipal bond SMA managers, be sure that they are keeping you updated with their views of the potential impact on the market and actual market reactions.

Visit The Wall Street Journal, and for their latest updates. (Or to catch yourself up, if you have tuned out on this topic.)

What does your firm’s research department have to say? Have their most recent research report handy to share with clients.

Determine if you will want to make pro-active calls to some of your clients.

Finally–block off some time in your calendar so that you will be able to be fully engaged with clients who need your guidance.

This is not a suggestion to buy, hold or sell Puerto Rico bonds–nor is it an opinion on the credit risk or likelihood of credit deterioration or default. This is only a recommendation to be paying attention to what is happening, because the constant drumbeat of news about Puerto Rico municipal bonds may have overwhelmed advisors’ and investors’ awareness. If the pace or gravity of the news flow changes, it is best to be prepared so as not to be forced to be reacting to the news.