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Insured Puerto Rico Bonds Get Attention in Slow Market

The municipal market was slow on Monday as traders gauged investor demand ahead of $11 billion of new issue volume expected this week. Some traders said poor economic data from Puerto Rico presented a buying opportunity for investors.

“We’ve got a very large calendar, with some unique deals,” a New York-based trader said in an interview. “It’ll be interesting to see how lots of supply going into Christmas will be met. I think there will be some buying if yields go up a little.”

Total volume for the week is expected to reach $11.33 billion, up from $6.23 billion last week, Ipreo, The Bond Buyer and Thomson Reuters numbers show.

“The market appears to be trying to hang on at these levels, but with any appreciable amount of supply, things may pop up quite a bit,” a Connecticut-based trader said. “Dealers still want to sell before we get a market with low participation.”

That includes three deals that are larger than $1.5 billion. California’s Foothill/Eastern Transportation Corridor Agency will bring two deals for more than $2 billion of refunding bonds, the Utility Debt Securitization Authority of New York has two for around $2.2 billion and the New York State Thruway Authority is issuing $1.6 billion.

“We don’t have a lot of concerns about the market’s ability to absorb this week’s calendar,” another New York-based trader said. “A lot of stuff was pushed into this week’s from last week; you can kind of look at as two weeks.”

Some investors took interest Monday in revenue-backed Puerto Rico bonds even as the government there released data showing the economy sank year-over-year in October.

Revenue-backed bonds such as the commonwealth’s Electric Authority PREPA bonds and sales tax financing corporation COFINA bonds are cheaper just by virtue of having Puerto Rico in their name, traders said.

“I’m not really fazed by much anymore,” a broker in New Jersey said in an interview. “All of the negative headlines have really pertained to the GOs, while the others have gotten cheaper. Puerto Rico is in much better shape in general than they were anytime in the last five to six years.”

The broker, who specializes in odd-lot trades on the secondary market – denominations of less than $1 million – said savvy traders view Puerto Rico doomsday predictions as overblown and are taking advantage of cheap prices on insured paper.

Puerto Rico’s economic activity index fell 5.4 percent in October from the year before. In September, the index fell 5.2 percent year-over-year. The index improved 0.6 percent from the previous month, marking the first consecutive monthly gains in a year.

“The insured Puerto Rico market, even after yields have come down, it’s still a lot better than the rest of the market,” he said. “A lot of people from the retail standpoint are buying long Puerto Rico bonds with insurers like National and Assured behind them.”

PREPA bonds insured by MBIA’s National Public Finance Guarantee Corporation with yields of 5.90% with a 5% coupon in 2019 are attractive, he said. Assured-backed bonds with yields of up to 7% on the long end of the curve are also getting attention.

Jefferies LLC held a second day retail order period for $700 million of New York City general obligation bonds in two series. The bonds, which are expected for institutional pricing Tuesday, were rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.

Yields on second day pricing were higher across the board than initial pricing Friday. Yields in the first series, $650.1 million, ranged from 0.62%, with coupons of 3.00% and 5.00% in a split maturity in 2016, to 4.48%, with a 4.375% coupon in 2033. Yields on the split maturity were originally at 0.57% on Friday. Credits maturing in 2015 were offered in a sealed bid.

Yields in the second series, $49.9 million, ranged from 0.62%, up from 0.57%, with a 5.00% coupon in 2016 to 3.56%, up from 3.49%, with a 5.00% coupon in 2025. Debt maturing in 2014 and 2015 were offered in a sealed bid. The bonds in both series are callable at par in 2024.

Yields on the Municipal Market Data triple-A scale Monday fell as much as one basis points on bonds with maturities on the long end of the curve, between 2041 and 2043.

Yields on the Municipal Market Advisors benchmark triple-A scale ended mostly lower on the front and long end of the curve. Bonds maturing in 2016 and 2017 fell one basis point, as well as bonds with maturities in 2042 and 2043. Yields on bonds maturing in 2019 gained a basis point.

Treasuries continued into Monday firmer, with the benchmark 10-year yield down two basis points to 2.85%, the 30-year down four basis points to 3.87% and the two-year yield one basis point lower at 0.30%.

“Treasury markets bounced back and that’s probably frustrating some muni people a little bit,” a New York-based trader said.

Secondary market trades compiled by data provider Markit showed a mixed palette of weakening and strengthening. Yields on New York tobacco settlement 5s of 2018 and Massachusetts state development 5s of 2027 fell two basis points to 1.35% and 5.05%, respectively.

Yields on University of Arkansas 5s of 2029 jumped three basis points to 3.98%, while yields on Dallas Fort Worth airport 5.25s of 2029 climbed two basis points to 4.51%.

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