Puerto Rico Bonds.

Most people are not familiar with US territorial bonds.  The largest issuers being The Virgin Islands, Guam, and Puerto Rico.  We currently own two of these issuers, Guam and Puerto Rico.  We reasoned that Guam being out in the Pacific owning airport bonds seemed like a no brainer safety wise as how else could someone make a timely trip to the island as needed.  We also like airport bonds in general as this is a business that is not going away and airport authorities can raise ticket prices as much as needed to pay for bonds. We also own Puerto Rico bonds as well since the island nation has significant advantages of being close to the US mainland and also significant advantages when it comes to trading and manufacturing offshore for US firms.  Frankly the only reason we do not own any Virgin Island bonds is that we have yet to have the opportunity to buy issues. 

The most important point about any of three territorial bond offerings is that all are triple tax free.  Absolutely no income taxes for anyone living in any state in the US to pay.  That makes these bonds attractive for many people in high tax states.  It also make these bonds attractive for many municipal bonds funds.  Lots to like there in that there is high ownership, high trading capacity, and one gets to keep the entire interest payment. 

In the last decade Puerto Rico has been in a serious recession. There has been some political turnover and some unease in the bond market from both of these events.  There is also the fear that Puerto Rico will be the next Detroit since unlike US states there is concern of some type of bankruptcy.  We do not see bankruptcy as a possibility.  The US Government basically guarantees much of Puerto Rico debt since it is a territory and being a sovereign entity the island can raise taxes to cover whatever principal and interest needed to be paid.  The current government has said they stand fully behind their bonds and will do whatever is necessary just to back that point up.  Is there risk, yes there is some, but in our opinion not enough to go out and dump our currently owned bonds.  In fact we are going to be searching for some buys ourselves here. We believe there is plenty of safety and we also believe there is lots of opportunity as well since the market has sold off a number of the Puerto Rico bond issues in the last year. 

Almost all Puerto Rico issues are rated BBB, which is investment grade.  One can buy Puerto Rico General Obligation bonds as low as 65 cents on the dollar right now. Even power agency bonds can be had for 75 cents on the dollar.  Looking at the GO's at 65 cents on the dollar with an interest rate of 6.0% one is looking at 9.25% on the invested dollar.  Let's add in a 30% combined state and federal tax rate and one is earning 12% plus on the bond.  With the slight risk involved and the opportunity for capital gains when the Puerto Rico economy regains it's footing this might be one of your best chances for serious returns over the next 5 years out there right now. 

As with all municipal bonds I would suggest one buy individual bonds and not bond funds since buying bonds yourself offers the opportunity to hold onto them until maturity and earn both the capital gain and interest.  Like buying a stock for the same reason.