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Market Post: Puerto Rico GOs Leading January Muni Rally

Puerto Rico general obligations have outperformed AAA-rated GOs as municipal bonds have rallied this month.

Yield on 10-year Puerto Rico bonds has fallen 69 basis points since the beginning of the year, compared with a 30 basis point-drop on AAA bonds with the same maturity. Puerto Rico bonds maturing in 30 years have fallen 47 basis points, compared with 37 basis points on AAA bonds.

"It seems like it's firmed up a bit more," a trader in New York said in an interview. "I get interested in Puerto Rico when there's bad news. I wait until people start running and then I start buying."

The trader isn't alone after softening 100 basis points in December, the commonwealth's bonds are now rallying more than other BBB-rated GOs, which have slid 37 basis points on the 10-year and 43 basis points on the 30-year, according to Municipal Market Data.

"It's trading like garbage right now anyway," the trader said.

Puerto Rico debt has a tendency to get oversold at the end of the year, and may be recovering from that, one Chicago-based analyst said. In December 2012, 10-year Puerto Rico bonds gained almost 50 basis points, and vacillated in January before ending 10 basis points higher. Bonds with 30-year maturities rallied that month.

"It tends to get a little oversold at year end due to fund window-dressing and tax loss harvesting," the analyst said. "The tax loss sellers usually need to buy it back in January."

The rest of the municipal market was mixed Wednesday morning, according to MMD. Yields on bonds maturing from 2022 to 2026 gained as much as two basis points, while most other parts of the curve remained steady.

Treasuries fluctuated and ended Tuesday firmer, with the 10-year yield down three basis points to 2.72%. The 30-year yield declined one basis point to 3.66%, while the two-year gained one basis point to 0.37%.

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