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Could Puerto Rican Debt Comments Wreck the Entire Bond Market?

October 4, 2017
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During an interview with Geraldo Rivera, President Trump said about Puerto Rico that “they owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out. You’re going to say goodbye to that.”

“That” references the $73 billion debt that the island has been dealing with for years. Marketwatch reports that:

If Trump wants to keep federal costs down, one way to do it would be to relieve Puerto Rico of its debt. Whatever the island does not have to pay investors could go toward post-hurricane reconstruction.

The issue however is that by suggesting that, the President rendered the entire Puerto Rican bond market worthless. Bloomberg reports that

Shares of bond insurers tumbled and the price of a tranche of the island’s bonds sank to levels equal to those in Venezuela after U.S. President Donald Trump suggested the debt may need to be “wiped clean,” while bonds issued by the U.S. Virgin Islands also came under pressure.

The result could prove to be disastrous for the Puerto Rican investment market. If the bonds are worthless, it could set a dangerous precedent for the island, as there would be no interest in bonds going forward.

The larger risk, however, is that the President just showed that he is capable of disrupting an entire bond market with a sentence. While Marketwatch says it is unlikely for the absolution of the debt to be cleared by Congress, the President has shown that he willing to make serious claims that can shake the markets. If a similar comment was said about states with declining economies, one could imagine a similar effect.

The outcome of Trump’s proposed solution for Puerto Rico’s relief will remain to be seen, but bond investors should be very weary. This could be warning sign that the bond market is susceptible to the President’s rhetoric, and if anything has been proven in the past year, it’s that we can almost certainly expect more suggestions of this magnitude going forward.

To read Marketwatch’s article on the President’s comments about the Puerto Rican debt, click here.

To read Bloomberg’s report on the effect the President’s comments had on the bond market, click here.

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