Standard & Poor’s shook the municipal bond market late Tuesday by downgrading Puerto Rico Aqueduct and Sewer Authority to junk status in what was an otherwise quiet week.
With a holiday-shortened trading week and subsequent quiet primary calendar, traders focused on the fallout of Standard & Poor’s junking of PRASA, cutting the rating to BB-plus.
By Wednesday morning, the bonds were trading lower.
In block trading, a dealer sold to a customer 5s of 2033 at 5.72%, up five basis points from a comparable block trade Tuesday.
Odd-lot trades showed more volatility.
A dealer sold to a customer 5.25s of 2042 at 5.81%, up 27 basis points from where it was sold Tuesday.
A dealer bought from a customer 5.125s of 2037 at 6.09%, up from 14 basis points from where the bond was bought Tuesday.
Bonds from an interdealer trade of 6s of 2038 yielded 5.96%, 23 basis points higher than where they traded Monday.
“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.”
“We are watching Puerto Rico but we are not active,” a Los Angeles trader said. “Of course when you get downgraded the pricing will drop but we’re not actively trading.”
Still, not everyone was convinced Puerto Rico would drag down the rest of the market. And indeed, muni bond scales ended firmer Wednesday.
“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.”
“It’s a slow open,” a Texas trader said Wednesday morning. “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.”
Some small deals priced Wednesday in the primary market.
“We saw the San Dieguito Union High School District deal and front end of the curve was oversubscribed and bumped,” the Los Angeles trader said. He said the strongest demand was inside 10 years.
De La Rosa priced $157.7 million of San Dieguito Union High School District bonds, rated Aa2 by Moody’s Investors Service. Prices were not yet available.
Bank of America Merrill Lynch priced $94 million of Mesa, Ariz., excise tax revenue obligations, rated Aa3 by Moody’s and AA-plus by Standard & Poor’s. The bonds yielded 2.29% with a 5% coupon in 2027 and 3.40% with a 5% coupon in 2032. Bonds maturing in 2027 are callable at par in 2017 and bonds maturing in 2032 are callable at par in 2022.
Barclays priced $90.2 million of Wisconsin Health and Educational facilities Authority revenue bonds, rated A2 by Moody’s and A by Standard & Poor’s. Yields ranged from 0.45% with a 2% coupon in 2013 to 4.35% with a 4.25% coupon in 2043. The bonds are callable at par in 2023.
In the competitive market, Raymond James won the bid for $80 million of triple-A rated Virginia Housing Development Authority commonwealth mortgage remarketing bonds.
The bonds are priced at par with a 0.85% coupon in 2016 to a 3.875% coupon in 2038. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed mostly strengthening. Yields on California 4s of 2020 fell four basis points to 1.77% and New York’s Metropolitan Transportation Authority 5s of 2038 dropped three basis points to 3.74%.
Yields on Massachusetts 5.5s of 2019 and Texas Municipal Gas Acquisition & Supply Corp. 5s of 2031 dropped two basis points each to 1.39% and 4.25%, respectively.
Still, some trades were weaker. Yields on New Jersey’s Tobacco Settlement Financing Corp. 4.75s of 2034 increased two basis points to 5.68% while New Jersey State Turnpike Authority 5s of 2043 rose one basis point to 3.82%.
Municipal bond market scales ended slightly stronger Wednesday after a quiet Monday and Tuesday.
Yields on the Municipal Market Data triple-A GO scale ended as much as three basis points stronger. The 10-year yield fell three basis points to 1.91% while the 30-year yield closed down two basis points to 3.09%. The two-year finished flat at 0.31% for the 27th consecutive session.
Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale ended as much as three basis points lower. The 10-year yield slid three basis points to 1.96% while the 30-year yield fell one basis point to 3.19%. The two-year held at 0.33% for the 22nd session.
Treasuries were stronger Wednesday. The benchmark 10-year yield fell six basis points to 1.85% while the 30-year yield dropped four basis points to 3.09%. The two-year yield slid one basis point to 0.25%.
Muni-to-Treasury ratios continue to climb as munis underperform their taxable counterparts and become relatively cheaper. The five-year ratio jumped to 116.4% on Wednesday from 101.3% at the beginning of March. The 10-year ratio soared to 103.2% from 96.2% on March 1. The 30-year ratio increased to 100% from 94.8% at the beginning of the month.
