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Investor exodus from Puerto Rico built speed in October

Franklin Resources Inc., BEN 0.58% one of Puerto Rico’s largest creditors, sold hundreds of millions of dollars of the island’s bonds in recent days, part of an exodus of investors hurt by accelerating losses in the wake of recent hurricanes.

A swath of mutual funds and hedge funds who held on to Puerto Rico’s roughly $70 billion of bonds even after the island started bankruptcy proceedings last year are now throwing in the towel. That includes Franklin Mutual Advisers LLC, a Short Hills, New Jersey-based unit of Franklin Resources, which has sold its entire $294 million stake in Puerto Rico general obligation bonds, people familiar with the matter said.

Bonds with a total face value of $8.24 billion have changed hands from the beginning of the month through October 23, more than in any other full month since the beginning of 2015, according to Municipal Securities Rulemaking Board data. The only time trading approached that amount was July 2015, after Puerto Rico’s then-governor said the island’s debts were “not payable.”

Puerto Rico bonds have since 2014 attracted a variety of distressed debt investors, especially hedge funds, because of their relatively cheap prices in otherwise red-hot debt markets. Some of those funds are now selling. Varde Funds and Merced Capital recently sold their holdings of $172 million of municipal bonds backed by Puerto Rico’s tax collections to other existing bondholders, according to bankruptcy court documents and a person familiar with the matter.

Franklin has been the second-largest mutual fundholder of Puerto Rico bonds, after OppenheimerFunds Inc. The two mutual funds have been part of a group of large Puerto Rico creditors fighting to recover some portion of their investments through a court-supervised restructuring.

Franklin Resource’s main mutual fund arm, based in San Mateo, Calif., also owned general obligation bonds and other types of Puerto Rico debt worth more than $1 billion at the end of the second quarter, according to data from Morningstar Inc. It is unclear whether any of those investments have changed.

Most mutual-fund managers are averse to keeping defaulted bonds through lengthy restructurings and many sold their Puerto Rico bonds to hedge funds, such as Aurelius Capital Management LP, Autonomy Capital LP and Canyon Capital Advisors LLC as the island’s financial woes accelerated.

The new buyers paid as little as 65 cents on the dollar through this first bout of selling, betting that they would recover much more once Puerto Rico recovered economically.

Franklin and Oppenheimer stood out because they kept much of their investments. The firms have experience working through restructurings and some analysts said they owned so many Puerto Rico bonds that it would have been difficult to quickly liquidate their holdings without swamping the market.

When Puerto Rico began restructuring its debt last year in the U.S.’s largest-ever municipal bankruptcy, investors holding different types of Puerto Rico bonds split into factions, battling the island’s government and each other to get better treatment. Franklin and Oppenheimer had been seen as power brokers in the process because they owned big chunks of the island’s different types of bonds.

The recent selling began this spring as the island’s government and federal oversight board took a tougher stance with creditors in its bankruptcy process. Then came Hurricane Maria and the humanitarian and economic devastation left in its wake.

The storm, and comments by President Donald Trump hinting at debt forgiveness, upended bondholders’ calculus. Prices of general obligation bonds sold by the Franklin Mutual Series have been cut in half since May and now trade around 30 cents on the dollar, according to data from the Municipal Securities Rulemaking Board.

The precipitous drop in prices has piqued the interest of some investors who long avoided Puerto Rico.

AllianceBernstein Holding L.P . sold the last of its Puerto Rico bonds in 2014 believing that the island’s debt load was unsustainable, making default inevitable, says Joe Rosenblum, the investment firm’s director of municipal research.

“The prices are so low that it makes us ask the question whether we’re at the right levels to get back in,” Mr. Rosenblum says.

But even at current valuations AllianceBernstein remains concerned about the risk that politics in Puerto Rico and in Washington, D.C. will adversely impact bondholders. The Senate on Tuesday passed legislation that extends emergency credit to Puerto Rico and Mr. Trump has criticized corruption in Puerto Rico and questioned how long the federal commitment to disaster relief should last.

“You can run as many spreadsheets as you want but how do you interpret the politics around it,” Mr. Rosenblum says.

Latest Use for a Bitcoin Technology: Tracing Turkeys From Farm to Table

Cargill tests a blockchain tool that would let shoppers see where their individual bird came from

Agricultural conglomerate Cargill Inc. aims to harness the technology underlying bitcoin to let shoppers trace their turkeys from the store to the farm that raised them.

Cargill is test-driving a digital tool called blockchain that structures data into a series of records that can’t be changed or removed. The cloud-based data can be shared across a network of computers, and securely added to by various participants.

Some food company executives say such records could be faster and simpler to use than the industry’s current framework, which relies on various software systems as well as paper records. Besides Cargill, other companies are also exploring blockchain technology to track foods or ingredients.

The digital currency bitcoin was the first application built on blockchain, but the financial industry is also exploring it as a way to potentially trim billions of dollars in transaction and processing costs. It is also being evaluated for use managing health-care records and processing insurance claims.

In the food industry, a blockchain-based approach could make recalls faster and better pinpoint where affected products wound up, though much depends on ingredient suppliers, food manufacturers, distributors, retailers and food-service companies adopting a common system and standardizing data.

In its pilot program, Minnesota-based Cargill has used blockchain to build a series of links that will help track individual turkeys from four Texas farms to Cargill’s processing lines and ultimately to grocery stores. Each turkey in the program will bear a tag with a code that consumers can punch into a website, which will take them to a website detailing the farm that raised it.

“It’s bringing the digital supply chain to life,” said Debra Bauler, chief information officer for Cargill’s North American protein business.

Cargill and other food companies see broader potential for the technology. In August, International Business Machines Corp. said it formed a consortium with food makers such as Dole Food Co. and Tyson Foods Inc. and retailers including Kroger Co. and Wal-Mart Stores Inc. to figure out where blockchain can improve food safety and reduce waste.

Darrell Glaser, a Rogers, Texas-based farmer who raises turkeys for Cargill and is participating in the program, said he hopes it will reconnect an increasingly urban U.S. population with the rural areas and farmers that produce the country’s food. “It opens up our doors to the consumer,” he said.

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U.K. Economy Accelerates, Bolstering Case for Rate Rise

GDP expands 0.4% in third quarter, showing small improvement

LONDON—The U.K. economy accelerated in the third quarter, according to a preliminary estimate Wednesday, strengthening expectations that the Bank of England may raise interest rates as soon as next month.

The Office for National Statistics said U.K. gross domestic product expanded 0.4% in the third quarter compared with the previous three months, an annualized rate of 1.6%.

Sterling rose following the release of the figures, gaining 0.9% against the dollar to $1.3250. U.K. government bond yields also rose.

The performance marked a small improvement from the second quarter, when Britain posted the slowest growth among all 28 countries of the European Union, alongside Portugal, at 0.3%. Yet the economy continues to lag its peers, highlighting how the U.K. has this year partially missed out on a global upswing that has seen many of the world’s big economies enjoy a robust and synchronized expansion for the first time since the financial crisis.

The U.S. notched up its best performance in two years in the second quarter, growing by an annualized 3.1%, while the 19-nation eurozone expanded at double the rate recorded by the U.K. An estimate of third-quarter growth in the U.S. is due Friday, with figures for the eurozone scheduled for Tuesday.

Growth in Britain has been hampered by a squeeze on household budgets and subdued investment, twin consequences of voters’ decision last year to withdraw from the EU. Annual inflation hit 3% in September as a slide in the pound pushed up prices, while businesses have mostly put off major outlays until the U.K.’s future ties to the EU are clearer.

“The U.K. economy remains locked onto a low growth trajectory,” said Suren Thiru, head of economics at the British Chambers of Commerce.

The BOE has signaled that it nevertheless expects to soon raise borrowing costs in the U.K. for the first time in a decade to keep a lid on broader price pressures in the economy. Officials led by Gov. Mark Carney fret that uncertainty over the U.K.’s future ties to the EU is restraining the economy’s ability to grow without fueling faster inflation.

Most economists and investors anticipate the central bank will nudge up its benchmark interest rate Nov. 2, to 0.5% from 0.25% currently, reversing a cut implemented in the wake of the referendum. Officials say future increases will likely be gradual and limited.

The anticipated action by the BOE is part of a broader move by central banks to tiptoe back from the extraordinary stimulus they have pumped into their economies over the past decade. In the U.S., the Federal Reserve is expected to raise short-term interest rates for the third time in December, while the European Central Bank is expected on Thursday to pare back its monthly bond purchases.

The ONS said Wednesday that growth in the U.K. in the third quarter was driven by sectors including finance, computer programming and retailers. Manufacturing also aided the expansion, suggesting the weak pound is helping exporters.

“Our order book has never been fuller,” said Oliver Gwynne, marketing manager at B&B Precision Engineering (Huddersfield) Ltd., a maker of machine tools in northern England.

British officials are hopeful that a breakthrough in talks with the EU over the terms of the U.K.’s divorce and future relations will help the economy grow faster in 2018. Treasury chief Philip Hammond is due to present his latest tax and spending plans Nov. 22.

EU leaders last week signaled willingness to advance to the next phase of Brexit talks, covering issues such as trade, but said that U.K. Prime Minister Theresa May must first provide more details on how much the U.K. will pay the bloc upon leaving.

Morgan Stanley research department updates its annual "Secular Growth Stocks" report, highlighting 29 North American stocks that can grow strongly independent of global economic conditions. The firm also updates its list of 37 underweight-rated "Secularly Challenged Stocks."

Junior Mistake...