Yes, it’s only Tuesday morning and yet it’s been a rough start to the week in the fixed income markets. Investors woke up this morning to news that banks and markets throughout Greece would be closed until next week, after a proposed referendum vote announced by Prime Minister Alexis Tsipras. This, on the heels of the news that Greeks are now limited to a maximum withdrawal of €60 per day.

As we discussed last week, Greece is due to make a payment to the International Monetary Fund by this tonight—Tuesday, June 30th—which looks likely to be missed. The effects of the latest development, at home, were a downward pressure on Treasury yields. The flight to quality we anticipated has started to come to fruition with yields posting their biggest one-day declines since late 2011. Yields on the 10-Year Treasury fell 14.7 basis points to 2.33% and the 2-year yield declined 7.5 basis points to 0.637%. The long end of the curve did not fare much better with rates ending at 3.078%, representative of a 17 basis point drop.

Meanwhile closer to home, weekend developments in the island commonwealth of Puerto Rico added fuel to the fire for concern in the rates markets and had a more generalized effect on the municipal spectrum. Rates in the muni market closed down 6 basis points in both the 10 and 30-year portions of the curve. Prices of Puerto Rico specific debt issuances fell even harder with prices declining almost 10% from Friday; not helped by comments from Governor Padilla citing the island’s debt being “not payable”.

The situation in Puerto Rico has been dire for quite some time. Many attribute the beginning of financial woes to the end of corporate tax breaks in 2006, which led to the departure of many pharmaceutical and manufacturing firms that had business centers there. However, other economic stresses to the system have had equal effects, such as the housing bust and general recession on the US mainland. For an economy that derives a good chunk of its gross national product from tourism, the lack of extra dollars in vacationers pockets means less dollars ending up on the island. According to an IMF report published over the weekend, cited the largest drivers of the poor economy were caused by the rising cost of oil prices between 2005 and 2012 coupled with high employment and labor costs. For instance, the US federal minimum wage is equivalent to almost 77% of per capita income in Puerto Rico compared to just 28% for mainland US. This acts as a disincentive for employers to hire workers and contributes to only 40% of the adult population working at this time.

Puerto Rico is certainly in a class by itself as far as the composition and size of its debt load. The island has used additional debt to balance budgets. In fact, public sector debt has risen every year since fiscal 2000 and they still continue to run budgetary deficits. In perspective, the $72 billion that is owed by Puerto Rico is more than four times the size of Detroit’s debt obligations. With a population of only 3.6 million, the debt per capita is larger than any US state, by far.

How the situation in Puerto Rico will play out is anyone’s guess. What we do know is that the island Commonwealth is not allowed to seek any sort of Chapter 9 protection and the US government reiterated today that it would not be providing any ancillary support or bailout in this matter. Governor Padilla is adamant that all involved parties must come to the table willing to give concessions to avoid a default. In the event of one, we are fairly confident that any insured bonds will continue to be money-good going forward and the fears of widespread contagion to the rest of the municipal market seem unfounded at this time given the overall average increase in underlying credit for both the local and state level issuers.