Puerto Rico bonds: Great upside, but buyer beware

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High-yield Puerto Rican bonds hold upside, but big risks remain as the commonwealth could fail to meet its next payment deadline, one municipal bond investor said Thursday.

The cash-strapped island's Public Finance Corp. faces an Aug. 1 deadline to pay $58 million to bondholders. At low prices, Puerto Rican municipal bonds make a strong play for yield seekers if the government can make its payments, said Daniel Solender, lead portfolio manager for municipal bonds at Lord Abbett.

"Prices are low today. There's a lot of potential decent outcomes, even where the bonds are today," he said in a CNBC "Power Lunch" interview Tuesday.

A Puerto Rican flag flies from a building in San Juan, Puerto Rico.
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Solender manages the Lord Abbett Intermediate Tax Free A fund, which has a four-star rating from Morningstar. Puerto Rico bonds make up about 2.5 percent of his portfolio.

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Solender noted that, despite the appeal, the island's bond situation remains volatile as it tries to scrap together payments. Investors need to "be careful" with the market, he stressed.

"There's only uncertainty going forward about how those bonds will be paid," Solender said.

The Lord Abbett fund is up slightly, about 0.2 percent, this year.