Stunned Investors See 95% Gains on Defaulted Puerto Rico Bonds

Since sinking to a mere 20.8 cents on the dollar in December, prices on the island's most frequently traded securities have climbed steadily and reached a high of 45 cents last week before paring gains during the past few days. Not only are Puerto Rico's bonds the top performer in the $3.9 trillion municipal market, they've gained more than any other dollar-denominated debt in the world, according to data compiled by Bloomberg.

The rally started inconspicuously enough back in late December, with a penny gain here and there that analysts chalked up to bottom fishing after prices collapsed in the aftermath of Hurricane Maria.

But then the increases started coming in bigger chunks as word spread that the island may emerge from the devastation with more money on hand than anticipated, a development that creditors bet would translate into better debt-restructuring terms.

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"I'm surprised by the amount that the bonds have rallied because there's still a lot of questions to be asked," said Mark Paris, senior portfolio manager atInvesco Advisers Inc. which oversees $27.2 billion in municipal assets. "They need to do a lot for the people on the island before they start really worrying about bondholders. So I don't know how you calculate the recovery."

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Even with federal funds for rebuilding after the storm, Puerto Rico faces challenges. More than 45 percent of residents live in poverty, workforce participation is about 40 percent and the fiscal plan projects the population will still shrink.

"The numbers are still pretty ugly," said Joe Rosenblum, director of municipal credit at AllianceBernstein LP, which oversees $41 billion of municipal debt. "For now, I think the optimism has played out."