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Market Close: Puerto Rico Issuer Bankruptcies 'Out Of Question'

Puerto Rico officials sought to quell bankruptcy concerns over the commonwealth's issuers, calling such an outcome "completely out of the question" on an investor call Tuesday afternoon.

Immediate reaction to the call was limited as most trading in the commonwealth's bonds took place in the morning session. Still, traders said on first look, the revenue and expenses for fiscal 2014 are "moving in the right direction," and that they were reassured by Puerto Rico officials that "everything necessary" would be done to to honor Puerto Rico's commitments.

"Clearly the muni market is skeptical, and for good reason," said Bob Brinker of Brinker Advisory Services. "Forgetting about that for a moment, the initial first quarter 2014 budget figures appear to be improving with revenues up and expenses down. The big question is will the market provide them the time they need to watch their reforms work? If muni markets settle down, the budget numbers indicate they are on the right track."

Tuesday afternoon, a block-size interdealer trade of the commonwealth's general obligation bonds yielded 8.63%, up from 8.60% on Friday. A customer sold to a dealer Sales Tax Financing Corp. 5.75s of 2037 at 9.12%, down from 9.17% on Friday. In block size trading, a customer sold another CUSIP of COFINA 5.5s of 2042 at 8.39%, down from 8.62% on Friday.

A customer bought COFINA 0s of 2054 6.88% and 6.94% in two separate trades, close to the range of where the bonds were bought Thursday at 6.90%One Chicago trader said those bonds were the most traded of COFINA bonds Tuesday, with $10.1 million exchanged by mid-day Tuesday.

One trader in Boston said the overall market looked unchanged, though Puerto Rico trading was mixed. "Some bonds like the senior lien sales tax zeros are actually stronger," he said. "Some of the insured, coupon stuff is slightly weaker. Yield levels are less important than dollar price. Regardless of structure, a lot of bonds like Puerto Rico Aqueduct and Sewer Authority or Puerto Rico Electric Power Authority are trading based on potential recovery or restructuring level, not based on yield."

In the general market, the tone was steady to slightly weaker, following Treasuries, as the U.S. debt ceiling limit approached. "It's slightly weaker, but I'm seeing some turnover so it's not dead," a New York trader said.

A second Chicago trader said the markets were slow to get back to work after a three-day holiday weekend for bond markets. "D.C. is taking a bigger toll than people think," he said. "No one is willing to put capital at risk." With the government shutdown extending into its third week and the debt ceiling approaching Oct. 17, traders were cautious.

In the primary market, RBC Capital Markets priced for retail some of the $209.1 million of Pennsylvania Turnpike Commission bonds. The deal includes $107.4 million of subordinate revenue bonds, rated A3 by Moody's Investors Service and A-minus by Standard & Poor's and Fitch Ratings, and $101.7 million of motor license fund-enhanced turnpike subordinate special revenue bonds, rated A1 by Moody's and AA by Fitch. Institutional pricing is expected Wednesday.

Yields on the first series, $83.6 million of turnpike subordinate revenue bonds, ranged from 0.50% with a 2% coupon in 2014 to 5.18% with a 5.125% coupon in 2043. Portions of bonds maturing between 2026 and 2043 were not offered for retail. The bonds are callable at par in 2023.

The second series, $23.8 million of turnpike subordinate revenue convertible capital appreciation bonds, were not offered for retail.

Yields on the third series, $81.8 million of motor license fund-enhanced turnpike subordinate special revenue bonds, ranged from 0.35% with a 2% coupon in 2014 to 4.52% with a 4.5% coupon in 2031. Portions of bonds maturing between 2026 and 2043 were not offered for retail. The bonds are callable at par in 2023.

The fourth series, $19.9 million of motor license fund-enhanced turnpike convertible capital appreciation bonds, was not offered for retail.

RBC Capital Markets held preliminary pricing for $173.5 million of Florida's Hillsborough County Aviation Authority Tampa International Airport subordinated revenue refunding bonds subject to the alternative minimum tax. The bonds are rated A2 by Moody's and A by Standard & Poor's and Fitch.

Yields ranged from 0.80% with a 4% coupon in 2015 to 5% priced at par and 4.99% with a 5.25% coupon in a split 2030 maturity. Bonds maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2023.

This week's deals in a holiday-shortened week come as volume is expected to increase. Nearly $4.2 billion is expected to come to market, up from last week's revised $3.51 billion. In negotiated deals, $3.54 billion should be issued, up from last week's revised $2.79 billion. On the competitive calendar, $655.8 million is expected to be auctioned, down from last week's revised $721.2 million.

On Tuesday, yields on the triple-A Municipal Market Data scale ended as much as five basis points higher. The 10-year yield rose two basis points to 2.62% and the 30-year yield jumped five basis points to 4.23%. The two-year was steady at 0.35% for the third session.

Yields on the Municipal Market Advisors benchmark scale ended as much as four basis points higher. The 10-year yield increased two basis points to 2.77% and the 30-year yield climbed four basis points to 4.37%. The two-year was unchanged at 0.55% for the fifth session.

Treasuries continued to weaken as Tuesday progressed. The benchmark 10-year and 30-year yields rose five basis points each to 2.73% and 3.79%, respectively. The two-year yield rose two basis points to 0.37%.

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