Investors Love Puerto Rico While Pension Bomb Ticks: Muni Credit - Bloomberg

Investors Love Puerto Rico While Pension Bomb Ticks: Muni Credit - Bloomberg:
By Martin Z. Braun and Michelle Kaske - May 10, 2012 12:01 AM ET

Puerto Rico has been battling budget deficits for 12 years, has a public pension that’s 9 percent funded and a debt load almost as big as its economic output. That hasn’t dimmed demand for its bonds from municipal mutual funds catering to investors living in Silver Spring, Maryland, and Virginia Beach, instead of San Juan and Vieques.

OppenheimerFunds Inc.’s Maryland, Virginia and North Carolina tax-exempt funds hold more than 30 percent of their assets in debt issued by Puerto Rico and its agencies, data compiled by Bloomberg show. The bet paid off in the last year as investors hungry for yield and an exemption from local, state and federal taxes bid up securities from the island, which has a lower credit rating than any U.S. state.

“It’s not the first thing that most people would expect when they buy a fund with their own state’s name on it,” Eric Jacobson, director of fixed income at research firm Morningstar Inc. in Chicago, said in an interview. “Investors are courting the income that these funds are throwing off. The question is, do they really understand where it’s coming from.”

With local-government yields at the lowest since the 1960s, investors are looking past Puerto Rico’s chronic budget deficits and the threat of a downgrade from Moody’s Investors Service. Puerto Rico bonds earned 15.6 percent in the past year, beating all U.S. states and territories and the 11.3 percent return for the $3.7 trillion muni market, Barclays data show.