A year ago, hedge funds were bit players in Puerto Rico and municipal bonds in general, long regarded as a sleepy market dominated by mutual funds that buy and hold the same bonds for years.Hedge funds began descending en masse last fall, after a wave of bond selling — particularly by rich Puerto Ricans — caused prices to fall. Fund executives made frequent trips to the island — visiting shopping malls in San Juan, meeting with government officials and speaking with pharmaceutical executives with major manufacturing plants there.To show how irrational the municipal market had become, one hedge fund pointed out this summer that Puerto Rico bonds were trading at higher yields than debt in Iraq and Ukraine — values that suggested that the commonwealth was riskier than a war zone.Over the last year, the hedge funds have bought the government’s general obligation bonds, bonds used to prop up public employee pensions, and bonds that built the island’s highways.
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