Franklin Resources Inc. is leading money managers in adding junk-rated Puerto Rico bonds to mutual funds that focus on equities or other asset classes. The companies bought GOs as prices on Puerto Rico debt set record lows this year on speculation the U.S. territory and its agencies would default. The firms join hedge funds and other non-traditional buyers of munis who are purchasing the securities for their higher yields.  Investors are more comfortable holding the GOs after lawmakers passed a balanced budget in June and shielded the bonds from a law allowing some public agencies to negotiate with investors, said Gregory Whiteley, who manages government debt DoubleLine Capital LP, which oversees $52 billion.

In trading yesterday, some bonds reached a six-month high. “I don’t think there’s any immediate prospect for a default or a restructuring related to the general-obligation debt,’’ said Whiteley, whose company owns Puerto Rico GOs. “At the same time, it’s got a pretty attractive yield.’’ Lawmakers in June approved a law that would allow certain public corporations, including the Electric Power Authority, to ask bondholders to take a loss. GOs, bonds repaid with sales-tax revenue and debt of the Government Development Bank are exempt from the measure. Puerto Rico’s constitution requires that it repay GOs before other spending.

This portion of the article was taken from the Bloomberg Brief Municipal Market Newsletter.
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