(Bloomberg) -- Puerto Rico debt is rallying the most in two years, even under the threat of a cut to junk, as the commonwealth prepares to sell bonds for the first time since August.

The debt has returned 3.1% in January, beating all U.S. states in a Standard & Poor’s index. The gain follows a 4.9% tumble in December as yields soared to record highs, luring hedge funds and distressed-debt buyers. Sales-tax bonds ranked four steps below AAA and maturing in August 2037 traded Jan. 28 with an average yield about 1.5 percentage points above an S&P index of junk-grade munis.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.