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Puerto Rico Yield Penalty Doubles as Island’s Economy Shrinks

The extra yield on Puerto Rico general-obligation bonds has doubled in the past four weeks as its economy in July shrank the most in 41 months.

Puerto Rico bonds maturing July 2040 and rated one step above junk traded today with yields as high as 10.08 percent, the highest this year, data compiled by Bloomberg show. The average yield, 9.59 percent, is 4.83 percentage points more than top-rated munis with similar maturity. That’s twice the lowest spread this year, on Aug. 6.

“Spreads have been widening, people are averse to taking risk in the market and there’s an awful lot of concern about Puerto Rico and where it’s going,” said Matt Fabian, managing director at Concord, Massachusetts-based Municipal Market Advisors.

Debt sold in Puerto Rico is tax-exempt in all U.S. states, making the securities more attractive for state-specific muni mutual funds. The island’s economy contracted 5 percent in the year through July, the steepest reduction since February 2010, according to the Government Development Bank for Puerto Rico, which handles capital-market transactions for the commonwealth.

Municipal debt sold on the island lost 17.4 percent this year as of Sept. 6, surpassing annual losses for the island since at least 2000, according to Standard & Poor’s total return data. That’s more than three times the 5.3 percent loss in the broader $3.7 trillion municipal-bond market in 2013.

Puerto Rico is on the edge of a speculative-grade bond rating amid recurring budget deficits and a pension system with a lower funding level than that of any U.S. state.

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