Muni Bond Ripple Effects Of The Puerto Rico Bankruptcy

There are major ripple effects as a result of this bankruptcy, and they affect large mutual funds, tax-free bond strategies for many retired investors, and scattered individual bond issues. The holistic concern is that risk is now being added to a sector where traditionally risk was considered to be extremely low.

That's because the Puerto Rico default is not only the largest in American history, but it comes on the heels of Detroit, Stockton, and numerous other municipal defaults. This Moody's report provides information on the largest defaults up through 2014, and this one for 2015. In his report on 2016 defaults, including Puerto Rico, Matt Fabian of Municipal Market Analytics says, "This is a dramatic reshaping of the industry's overall risk profile and will doubtless drive at least somewhat more conservative investor behavior in the future, in particular as regards large distressed governments like IL, NJ, CT, KY, and Chicagoland credits."