Investors often buy bonds because they think they are safe. In reality, they are much riskier than you might think.
Slowed economic growth globally, resulting in negative interest rates abroad, are driving international investors to the safety of U.S. Treasuries.
This flight to safety has worked since treasury bonds and gold have outperformed stock market investments so far this year.
U.S. Treasury bonds are considered a “safe haven,” because investors have the full faith of the U.S. government to back the investment. But is government always so trustworthy a borrower?
Not for those who bought Puerto Rican bonds. Those investors may not see a penny back from their bond purchases, even though Puerto Rico’s constitution guarantees that bond payments must be made before all other payments. The governor has already stated he will not pay bondholders ahead of salaries and pensions, even though his constitution explicitly requires it.
This sounds like outright deception and fraud (yet with no government official facing an indictment). Innocent people bought those bonds based on promises made in the offering documents - promises made by the Secretary of State.
Keep an eye on other U.S. cities who can’t pay their bills due to extravagant government spending (Chicago). Whatever you do, don’t buy their bonds! They are NOT safe. You can watch on the sidelines as more and more investors snap up municipal bonds for yield and safety.
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