Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
There are defaults and there are defaults. It sounds like there's a good possibility that interest payments could be delayed (which constitutes a default). But most PR bonds don't come due for many years, and even if PR defaults on those, one does not (usually) lose anywhere near 100% of principal. So investors holding individual PR bonds may come out only somewhat singed. And much of this has already been priced into the market, so the time to bail may have passed.
On the other hand, as has been noted in many places, mutual funds show the full effect - precisely because the market has priced in the risk and their NAVs reflect that. M* has a good column breaking down the exposure of the largest muni bond funds, and those with the highest percentage of assets in PR bonds.
I suggest reading not only the column but the comments. For example, M* adds a comment explaining how the 80% portfolio requirement for funds (that 80% of a fund's contents must match the name of the fund) allows a single state fund (e.g. Franklin NJ Tax Free Income - FRNIX) to count PR bonds as part of that 80%, even though they're not from that particular state. In short, it's because the name says that you're getting income that's free of NJ taxes, not that the fund holds NJ bonds.
Comments
On the other hand, as has been noted in many places, mutual funds show the full effect - precisely because the market has priced in the risk and their NAVs reflect that. M* has a good column breaking down the exposure of the largest muni bond funds, and those with the highest percentage of assets in PR bonds.
I suggest reading not only the column but the comments. For example, M* adds a comment explaining how the 80% portfolio requirement for funds (that 80% of a fund's contents must match the name of the fund) allows a single state fund (e.g. Franklin NJ Tax Free Income - FRNIX) to count PR bonds as part of that 80%, even though they're not from that particular state. In short, it's because the name says that you're getting income that's free of NJ taxes, not that the fund holds NJ bonds.