Market Post: Investors Eye Revenue-Backed Puerto Rico Bonds

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.

“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.

The municipal market was slow overall as investors prepared for heavy volume slated for the week. 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.

Yields on the Municipal Market Data triple-A scale Monday fell as much as two basis points between three and four years out on the curve. Bonds maturing between 2041 and 2043 also saw yields drop by as much as a basis point.

Three issuers are expected to bring deals around $1.6 billion this week. 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 roughly $2.2 billion and the New York State Thruway Authority is issuing $1.6 billion.

Jefferies LLC held a second day retail order period for $700 million of 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.

Treasuries continued into Monday firmer, with the benchmark 10-year yield down two basis points to 2.85%, the 30-year down three basis points to 3.88% and the two-year yield steady at 0.31%.

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