Pacific Investment Management Co. and BlackRock Inc. say the entire $3.7 trillion municipal market is at risk should Puerto Rico lose its investment-grade status, even though many funds aren’t obliged to unload bonds cut to junk.
Pacific Investment Management Co. doesn’t hold Puerto Rico debt in its tax-free funds, and the company predicts that a lack of improvement in the island’s finances may increase volatility in other municipal securities.
Barely a year ago, the municipal bond market was tarred as a horrible investment. The expiring taxable Build America Bonds program had triggered an uptick in new issues that created a supply glut, bond rates were on the rise and analyst Meredith Whitney told "60 Minutes" that defaults would amount to "hundreds of billions of dollars." From October 2010 through January 2011, municipal bond funds saw net outflows of more than $33 billion, while a benchmark municipal bond index fell nearly 5 percent.
Pacific Investment Management Co. is betting that Manhattanites like Annie Zhou will help pay down $3 billion of debt that is transforming a former West Side industrial area into a neighborhood with shops and offices.