Market Post: After Downgrade, Puerto Rico Aqueduct's Flood Market

With the majority of the week’s primary offerings already priced, traders focused Wednesday morning on the downgrade of Puerto Rico Aqueduct and Sewer Authority.

Late Tuesday afternoon, Standard & Poor’s downgraded the Authority to BB-plus. Wednesday morning, there was a flurry of trades flooding the market.

“There are plenty of aquas for the bid,” a New York trader said, adding the commonwealth’s general obligation debt wasn’t affected in early morning trading. “Aquas are 20 to 30 basis points cheaper. It went from investment grade to speculative. That’s a big jump.”

Indeed, bonds on an interdealer trade of Aqueduct and Sewer Authority 6s of 2038 yielded 5.96%, up 23 basis points from a similar sized interdealer trade Monday.

A dealer bought from a customer 6s of 2038 at 6.13%, up 11 basis points from where the bonds were bought Monday.

A dealer sold to a customer 6s of 2038 at 5.72%, up five basis points from where they were sold Monday.

Still, other market participants weren’t sure the market would weaken substantially.

“Tuesday saw more negative news with another downgrade by a rating agency to Puerto Rico debt,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “With such little supply coming to market and continued European uncertainty the thinner bidsides probably won't cheapen the market.”

Outside Puerto Rico news, the rest of the market seemed firm, according to one trader.

“It’s a slow open,” a Texas trader said. “Looks like one to three basis points stronger. There is not too much out for the bid. It feels like some customers have already pulled back from the long weekend.”

In the competitive market Wednesday, triple-A rated Virginia Housing Development Authority should auction $80 million of revenue bonds.

Municipal bond market scales ended mostly steady Tuesday after a mixed session Monday.

Yields on the Municipal Market Data triple-A GO scale ended flat to one basis point weaker. The 10-year yield closed steady at 1.94% for the third session while the 30-year yield increased one basis point to 3.11%. The two-year finished flat at 0.31% for the 26th consecutive session.

Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale ended steady to one basis point weaker. The 10-year and 30-year yields finished steady at 1.99% and 3.20%, respectively. The two-year held at 0.33% for the 21st session.

Treasuries were much stronger Wednesday morning. The benchmark 10-year yield dropped six basis points to 1.85% while the 30-year yield plunged five basis points to 3.08%. The two-year yield fell one basis point to 0.25%.

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