Its interesting as to how many Municipal Bond Investors have bought Puerto Rican State and Local Government Bonds over the years. They were sold to them on the basis of the “triple tax-exemption”–free from the investors’ own City and State, as well as Federal Income Tax.
Unfortunately, in their haste to take advantage of such a deal, investors don’t know to ask, and were not told, of the basket case that Puerto Rico’s finances are in. High unemployment and many, many Residents work for some form of government entity or another. So, you know what Government Cut-Backs can do. So, yes bonds can be safe; but, only as long as the issuer can re-pay the Principal and Interest on the Debt.
Most brokers and Financial Advisors don’t truly understand the bond markets and, as we saw five years ago, Muni Bond Insurance can turn-out to be next to worthless. Remember also that Securities Salespeople are not Fiduciaries: they are only required to have their Firm’s and their own best interest at heart–and certainly not yours. Exception: Investment Advisory Accounts.
There is an extreme case of a local power company being virtually at the end of its financial rope. It has already borrowed money to pay-off prior debt (not a good sign) and, since then, Moody’s Investors Service (a primary credit-rating company), has downgraded the Utility’s bonds. That means that any future loans or bond issuance will carry a higher interest rate; but that is, if it can get a loan–or re-structure its current debt.
It is already considering filing for bankruptcy. The linked article, from the NY Times, is as follows: http://dealbook.nytimes.com/2014/07/01/puerto-ricos-indebted-power-utility-adds-to-islands-problems/?emc=edit_dlbkam_20140702&nl=business&nlid=64667462.
NOTE: This is currently an important topic, because bond houses are increasing their efforts to get a piece of those Retirement Nest Eggs that the Boomers are tapping. Whether it is non tax-deferred savings or money that those over 70 1/2 are required to withdraw from Traditional IRAs, they are preaching the Safety and Tax-Free status the Municipal Bonds are thought to have. Be careful about Munis!