A Ramble On The Puerto Rican Bond Market

To me, the big, big, big macro economic factor is population growth (or the lack of it). Coupled with population growth is the rate of aging within the population. I don’t care what the Fed and all the other CB’s do to push back on the deflationary consequences of demographics. Those forces of will trump the CB’s efforts, it’s just a matter of when.

Japan is the poster child for this issue. Zero immigration and a declining indigenous population will overwhelm Abenomics. Europe has the same problem, it’s about 10 years behind Japan.

And then there is the USA – we are about 20 years behind Japan. The forces of an aging population are already being felt. In March, Social Security paid out a record $70B. It took three years for SS to go from $60B to $70B a month. In about 18 months we will hit $80B, in March of 2022 the nut will be $120B.

I’ve been having deep thoughts on population because I’ve been watching Puerto Rico (PR) and its bond market. PR did a mega bond deal ($3.5B) a few weeks back . Before the issue was floated I wrote about it (Link) and suggested that the deal would be a big success – (the price of the bonds would rally post issue). And that’s exactly what happened. In a matter of days the bonds rose 7%, bringing a paper gain of $200+m for the fat cat hedge funds that cornered the deal.

Then someone hit the ‘sell button’ (PR hired some restructuring lawyers and everyone freaked out). There has not been a solid bid for weeks. This dog is now trading at 87.50 – plunging below the the issue price of 93 – the yield is pushing 9.5%. There is no real exit for the holders of these bonds. There is no new money chasing after the high yield as the bonds can’t be sold to retail investors. So the current holders of this swill are also the future owners. In between, it’s just passing the trash.

If I was stuck with these bonds I would be worried. This bond issue looks like the Facebook IPO – investors loved it in the first hour, and then hated it for a year. If things get sloppy, and some hedgies are forced to vote with their feet (AKA-Vomit) where might this bond trade? How about 12%?

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