A little bit of knowledge can often be worse than none.
Common sense suggests that reading esteemed financial publications and major brokerage house research reports would help investors make good decisions. In many situations it leads to exactly the opposite.
The handling of Puerto Rican (PR) tax-free bonds provides a perfect example of this phenomenon. Most people don’t have the ability to evaluate individual muni bonds. They count on their brokers or financial advisors to steer them into appropriate issues while relying heavily on rating agencies’ bond quality designations.
PR’s bonds had previously been widely recommended. Their coupon rates were higher than most other issuers and they offered tax-free treatment in all 50 states. Until recently, Puerto Rican general obligation (GO) bonds had been rated highly enough that debt holders believed they could expect to be paid back principal plus interest as promised.
Brokers sold, and individuals bought, PR munis at prices reflecting S&P, Moody’s and other ratings that falsely conveyed a rosier-than-real picture of that government’s ability to repay.  The last remnants of that fantasy ended when Barron’s Aug. 2013, cover story belatedly broke the news which bond trading firms already knew… PR was in serious financial trouble.
Â
 
 Spreads on Puerto Rico’s 10-year paper had already shot higher, pushing prices on existing PR bonds lower. The Barron’s story led to panic dumping and even lower resale prices for those investors wishing to exit their positions.
On February 4, 2014, ratings giant Standard & Poors also admitted what had been painfully obvious. They downgraded Puerto Rican GOs to junk status. This came only after severe damage to holders of older PR bonds. Spreads versus investment grade paper had ballooned from under 3% to about 7.5%. Way too late to help anybody, Moody’s finally joined in the downgrades, too.
