The commonwealth’s general obligations, which are tax-exempt in all U.S. states, are on the brink of speculative grade from the major rating companies as the island tackles recurring budget deficits and a struggling economy.
Yields on some general obligations set record highs last month. Investors demand about 5.2 percentage points of extra yield, or 520 basis points, to own 10-year Puerto Rico debt instead of top-rated securities, up from about 3 percentage points in mid-August, data compiled by Bloomberg show.
“It’s a dire situation in terms of the amount of debt they have outstanding, the weakness in their economy,” Hayes said in an interview with Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.” New York-based BlackRock, the world’s biggest asset manager, oversees $109 billion of local debt.
Compared with similarly rated credits, “it has been over the years overvalued in our mind,” Hayes said.
“In recent weeks, you’ve seen investors take a hard look at that. They’re way ahead of the agencies here. They’re actually pricing it like distressed debt, which is probably right,” Hayes said.
An index measuring the island’s economy fell by 5.4 percent in August from a year earlier, the steepest contraction since 2010, according to Puerto Rico’s Government Development Bank, which handles the commonwealth’s capital-market transactions.
Recent yields on Puerto Rico bonds have “gone up about two to 300 basis points, depending on the credit, and it may have another 150 to 200 basis points to go once they really get through this,” he said.
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