Power Lunch

Power Lunch

Tempted by Puerto Rico bonds? Be careful, expert warns

Puerto Rico: Beware buyer
Puerto Rico: Beware buyer

While investors may be tempted by high yielding Puerto Rico bonds, they need to be "very, very careful," one muni bond pro told CNBC on Tuesday.

"Puerto Rico has a lot of issues," said Bob DiMella, co-head of MacKay Municipal Managers, which oversees $11 billion in municipal bonds, including $600 million in Puerto Rico backed debt.

"There's ways of investing in there but you have to be very active and understand the nuances of the credits."

Puerto Rico has been struggling with $73 billion in debt, and on Friday a federal judge voided a law that allowed the government to restructure certain debts. Puerto Rico has said it will appeal the ruling, saying it would leave the commonwealth in legal limbo and struggling to find a way to manage its debt load.

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"When you're talking about Puerto Rico general obligation bonds, you're talking about the high-yield marketplace, a distressed type of situation," DiMella said in an interview with "Power Lunch."

"Officials in San Juan need some type of restructuring ability."

File photo: Public water utility workers fix a pipe in Old San Juan.
Getty Images

He believes Puerto Rican bonds pose too much risk for the average investor, noting "even hedge funds got tripped up here. [The] muni market is not your typical distressed area."

"When you are talking about investing in these types of securities, without that full understanding of what exactly Puerto Rico needs … you have to be very, very careful."

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If investors still want to proceed, they should avoid unenhanced credit, he warned.

"Invest in securities that have an insurance wrapper on them. Take some of your downside risk out away from the equation," DiMella said. "Wait for the uncertainty that is surrounding Puerto Rico … [to be] gone and therefore you have a clearer understand of which other credits to buy."

—CNBC's Kerima Greene and Reuters contributed to this report.