NEW YORK (MarketWatch) — Investors are intently watching two separate stories in the bond market Monday that could have rippling effects, challenging the traditional notions of how bonds are paid.

Argentina is expected to enter technical default for the second time in less than 15 years as the pariah of the debt markets negotiates with creditors in the wake of a Supreme Court ruling mandating payouts to a group of hedge funds. The South American nation’s negotiations are already rewriting the rules of sovereign debt restructuring.

Separately, a Puerto Rican agency is on watch for a potential default Tuesday after the U.S. commonwealth passed a law allowing its public corporations to restructure their municipal bond debt last week. Puerto Rico’s bonds are held in a wide array of municipal bond funds because of their exemption from federal, state, and local taxes, which means a default could portend broader pain in the market for local government bonds.

Cry for me, Argentina

Argentina has for years been locked in a legal battle with a group of hedge funds that refused to take an earlier restructuring deal on bonds that defaulted in 2001. Investors, led by Paul Singer’s NML Capital, have demanded to be paid in full due to a clause in Argentine bond documents that says the country can’t pay some bondholders without paying the others, called pari passu.

Argentine President Cristina Fernandez de Kirchner Reuters

The country’s leadership has called these investors “vulture funds,” a reference to the tactic of buying up distressed debt at low prices and taking steps to enhance the payout. The country has sought to forego payments to the holdouts while paying the rest of the creditors — and it has generated a lot of publicity in the process. The nation has said it cannot afford to pay the vultures while also paying the investors who accepted the restructuring deal years ago.

The case has been making its way through U.S. courts for years, but the Supreme Court handed the hedge funds a major victory earlier this month when it declined to take up the case. That left in place a lower court ruling mandating Argentina must pony up the money to Singer & Co.

Argentina has a payment due on its restructured debt on June 30, but if it can’t work out a deal to pay the holdouts, it must miss the Monday deadline to pay the restructured bonds. That triggers a technical default, setting in motion a 30-day grace period before it becomes a full-fledged nonpayment.

The government tried to deposit money in a fund to pay on the restructured bonds last week, but a federal judge rebuffed that action, saying that it can’t pay on the restructured bonds without making good on the money owed to the holdouts. If those creditors manage to get full payment from Argentina, it may impact the willingness of other sovereign debt bondholders to accept a restructuring in the future.

Investors remain hopeful that a deal will be reached. The Argentina Merval stock index AR:MERV dropped sharply in the wake of the Supreme court decision, though it has since rebounded. The index is on track to gain 2.5% this month. Argentine bond prices were stable Monday, according to Dow Jones newswires.

Puerto Rico surprise

The economically beleaguered commonwealth of Puerto Rico took municipal bond investors by surprise last week when it passed legislation that allows the island’s public corporations to negotiate a debt restructuring. These corporations, in particular the Puerto Rico Electric Power Authority, the Puerto Rico Aqueduct & Sewer Authority and the Puerto Rico Highway & Transportation Authority, issued nearly a third of the approximately $73 billion of the island’s outstanding bonds.

“This legislation is a reaction to the very real economic and fiscal stress experienced by all Puerto Rico entities since 2006,” wrote Barclays analysts, led by Thomas Weyl, in a report late last week.

Puerto Rico is a major issuer in the municipal bond market, selling debt in recent years to increase cash flow and aid in its budget deficit, even amid deteriorating fiscal conditions and population flight. Because many mutual funds hold the island’s junk-rated debt to generate tax-exempt yield, mom-and-pop investors in the muni market have a big stake in Puerto Rico.

Read: Puerto Rico’s travails hit muni bond firm that bet big

Two money management firms that hold a substantial chunk of Puerto Rico debt — Franklin Templeton Investments and OppenheimerFunds Inc. — both tried to block the law. Ratings analysts who dropped the agency debt ratings last week, said the law elevates other creditors like pensioners and public employees above bondholders.

Puerto Rico must make debt payments on its PREPA bonds on July 1. The island insists that it is willing and has the ability to pay on its debt, but investors are on edge.

“The law is potentially most imminently applicable to PREPA, which faces significant liquidity needs with near-term maturities of large bank borrowings,” said analysts at Moody’s Investors Service, led by Emily Raimes.

One tranche of PREPA debt maturing in 2028 dropped in price to 45 cents on the dollar after the law’s passage, from 53 cents before. The debt yielded nearly 15% on Friday.

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