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UBS Puerto Rico Bonds Lead to $8.3 Billion in Losses for Muni Bond Funds

Posted: Nov 12, 2013 | Posted in:

Muni bond funds are supposed to be a relatively safe investment, and many investors who put their retirement money or financial savings into muni bonds believe they are getting a low-risk investment with tax advantages. Unfortunately, UBS Puerto Rico bonds have proven to be neither low-risk nor wise investments. In fact, muni bond funds that were heavily exposed to Puerto Rico debt have lost $8.3 billion in net assets in 2013. These astronomical losses fell on investors who were taken by surprise and who may not have the time or money to absorb such a loss or wait for a market rebound.

UBS Puerto Rico Bond Funds Cause Devastating Losses

Despite a stagnant economy and waning tax revenues, Puerto Rico sold $70 billion in debt, much of which was purchased by mutual fund managers.  A total of $10 billion of this debt was sold by UBS, and much of the debt was bought by mutual funds including portfolios managed by OppenheimerFunds.

Unfortunately, downgrades in Puerto Rican debt coupled with threats of potential bankruptcy have burdened investors with significant losses.  As Reuters reported, U.S. municipal bond funds that have at least five percent exposure to UBS Puerto Rico bonds and other Puerto Rican debt have suffered an $8.3 billion decline in net assets just in 2013 alone.   At the end of 2012, these funds had a value of $50.6 billion.  They have now declined 16.3 percent.  Municipal bonds with less than five percent exposure have still suffered declines, dropping 10 percent.

While all investors with exposure to Puerto Rican debt have suffered, one of the hardest hit funds was the Hancock Horizon Mississippi Tax-Free Income Fund.  The fund was a $29 million fund launched in 2011 in order to invest in Mississippi and local communities.   Around 11 percent of the assets in the fund were invested in Puerto Rican debt, resulting in a 35 percent decline this year.

The municipal bond market, overall, has experienced a tough year because of UBS Puerto Rico bonds and because of risks associated with Detroit debt.   While funds with less than five percent exposure are off .69 percent, municipal bonds with at least five percent exposure to debt from Puerto Rico have suffered a negative return of 5.07 percent this year.   The S&P Municipal Bond Puerto Rico index is also down 15.25 percent, demonstrating just how big of an impact these UBS Puerto Rico bonds have had on the bond market.

Unfortunately, these massive losses are largely being borne by investors who were not informed about the risks their fund managers were taking with their money.  Investors have taken more than $6.5 billion from municipal bond funds in September, most from funds with exposure to Puerto Rico.  Investors who face significant and unexpected losses as a result of mutual fund managers who failed to warn them of the risks may have a cause of action against the fund managers responsible for the risky investments.  If you are unsure about your investment and how it relates to Puerto Rico bonds, consult a lawyer for assistance.