Pimco Avoids Puerto Rico in Tax-Free Funds Amid Island Woes

(Bloomberg) -- Pacific Investment Management Co. doesn’t hold Puerto Rico debt in its tax-free funds, and the company predicts that a lack of improvement in the island’s finances may increase volatility in other municipal securities.

Puerto Rico’s economy is shrinking and the commonwealth has relied on deficit financing to balance recurring budget gaps. Its general obligations, whose yields rose to record highs last month, are rated one step above junk. The island’s debt lost value the past four months, the longest slide since 2011, Standard & Poor’s data show.

“We’re not here to beat up on Puerto Rico,” Joe Deane, head of munis for Pimco in New York, said in a telephone interview. “But it’s important for people to understand out there that as a municipal group our exposure to the island is zero, and we intend to stay there for the foreseeable future.”

The Newport Beach, California-based company, which managed $1.97 trillion as of June 30, holds about $60 billion of munis across its funds. Pimco has had no allocation to Puerto Rico in its tax-exempt funds for six months, Deane said.

Should Governor Alejandro Garcia Padilla, 42, who took office in January, be unable to turn around the island’s economy and end budget gaps, yields on Puerto Rico debt would jump further, Deane said.

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