Market Close: Puerto Rico Prices Fall On Investigation, “Completely Junk” Comment

Puerto Rico bonds continued their price decline Wednesday after hedge fund manager Kyle Bass called the bonds “completely junk” and Massachusetts Secretary of the Commonwealth sent letters to large mutual fund managers inquiring about exposure to the territory’s credits.

Sellers put Puerto Rico bonds out for bid, though traders said they were cautious to give up bonds to buyers demanding near double-digit yields.

Bass, founder of Hayman Capital Management called Puerto Rico debt “completely junk” on CNBC.

“There are a ton of bids-wanted but no one wants to sell at the bottom,” a New York trader said. “We’ve got buyers only buying at double-digit yields.”

This trader said bids-wanted included longer-dated Puerto Rico Public Building Authority 5s at 10%, another longer-date Public Building Authority 6.5 at 10%, and Puerto Rico Electric Power Authority bonds in the middle of the curve at a 7% yield. Puerto Rico Sales Tax Financing Corp. bonds were also yielding double digits, he said. “Puerto Rico is junk. Yields are higher than a week or two ago. And compared to a month ago they are well off.”

Late Wednesday afternoon, Secretary of Massachusetts William Galvin announced his securities division began an inquiry to determine investors’ exposure to Puerto Rico, if investors were made adequately aware of the risks, and if the bonds were priced properly. The first set of inquiry letters were sent to Fidelity, Oppenheimer Funds, and UBS. The securities division also seeks to know when the funds first became aware of the financial situation in the commonwealth.

After the news, a flurry of bids-wanted hit the desks. “There is tons of selling on anything I can get a bid on,” this trader said.

In the general market, high-grade municipals continued to trade mostly flat to two basis points weaker, setting the same tone as earlier in the week as buyers remained cautious over the debt ceiling and government shutdown.

Bond markets also digested news that President Obama nominated Janet Yellen to replace Ben Bernanke as the next chairman of the Federal Reserve Board. “Most of the reaction happened for Summers,” a second New York trader said, referring to Lawrence Summers, once considered the front runner, withdrawing his name from consideration last month. “Everyone assumed at that point it would be Yellen.”

In the primary market, Bank of America Merrill Lynch priced for retail the largest deal of the week, $584.5 million of Wisconsin general obligation bonds, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.

Yields on the first series of $402.7 million of general obligation refunding bonds ranged from 0.70% with a 3% coupon in 2016 to 4.20% with a 4.125% coupon in 2033. The bonds are callable at par in 2023.

The second series of $181.8 million of GO refunding bonds were not offered for retail.

Morgan Stanley accelerated its institutional pricing period to Wednesday due to strong retail demand in the morning for $176.1 million of Connecticut Housing Finance Authority mortgage finance program bonds. The bonds are rated triple-A by Moody’s and S&P.

Bonds in the first series of $29.9 million were priced at par to yield 0.55% in 2015 to 3.00% in 2021. Yields were lowered five basis points from retail pricing on bonds maturing between 2015 and 2019.

Bonds in the second series of $127.4 million were priced at par to yield from 3.00% in 2021 to 4.10% in 2028. Bonds maturing in 2033 yielded 2.70% with a 4% coupon. Yields were lowered five basis points on bonds maturing in 2028 and 2033.

Bonds in the third series of $18.1 million, subject to the alternative minimum tax, were priced at par to yield 0.45% and 0.55% in a split 2014 maturity to 2.20% in 2018.

Bonds in the fourth series of $780,000, also subject to the alternative minimum tax, were priced at par to yield from 0.60% in 2014 to 3.40% in 2021.

In the secondary market, trades compiled by data provider Markit showed mostly weakening. Yields on Texas Tech University 5s of 2037 increased four basis points to 4.33% and California’s Golden State Tobacco Securitization Corp. 5.75s of 2047 rose three basis points to 7.93%.

Yields on Minnesota General Fund 5s of 2023 and New York City Transitional Finance Authority 5s of 2032 rose one basis point each to 2.78% and 3.78%, respectively. Yields on New Jersey Environmental Infrastructure Trust 5s of 2023 increased one basis point to 2.69%.

On Wednesday, the triple-A Municipal Market Data scale steepened with yields on the short-end falling and yields on the long-end rising. The 10-year and 30-year yields rose two basis points each to 2.56% and 4.14%, respectively. The two-year was steady for the seventh session at 0.37%.

Yields on the Municipal Market Advisors benchmark scale ended as much as three basis points higher. The 10-year yield increased one basis point to 2.72% and the 30-year yield climbed two basis points to 4.30%. The two-year was steady at 0.55% for the second session.

The Treasury yield curve steepened Wednesday. The two-year yield fell three basis points to 0.37%. The benchmark 10-year yield rose two basis points to 2.66% and the 30-year yield climbed three basis points to 3.73%.

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