Market Close: Puerto Rico Bonds Extend Rally

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Puerto Rico's bonds gained for a sixth day Thursday as a rally in fixed income markets lifted municipal debt.

Yields on both Puerto Rico general obligation and Puerto Rico Electric Power Authority debt declined, even though an afternoon investor call hosted by the island's Government Development Bank was expected to be negative, a trader from Chicago said.

The yield on GO 8s in 2035 fell to 9.074%, from 9.76% on July 9.

Puerto Rico yields had soared earlier in the month after the government passed a law allowing public corporations to restructure debt.

"The GDB call won't have a huge influence on the directionality [for Puerto Rico bonds]," a trader in Virginia said. "There's been uneven economic data coming out of the island for some time now and the municipal market has been largely trading based on supply and demand."

PREPA debt has also enjoyed an rebound. The yield on PREPA 5s in 2030 dropped to 11.375% from 13.45% on July 9.

The Treasury market strengthened on Thursday with the two year note rallying by two basis points to 0.47%, and yields on the 10-year declining by eight basis points to 2.46% and by six basis points on the 30-year to 2.28%.

Market participants said that treasuries were aided by global economic tensions, which heightened on reports that a Malaysian commercial plane was shot down in eastern Ukraine.

Municipal bonds continued to rally for a third straight day on Thursday, with yields on bonds maturing in three to four years declining by as much as two basis points, and from one to three basis points for bonds maturing from five to six years, according to Municipal Market Data's AAA-scale. Yields on bonds maturing in seven to 26 years dropped from three to five basis points, while they slipped from two to four basis points for bonds maturing in 27 to 30 years. Municipal Market Advisors data showed.

The rally extended to many AAA-rated credits across the country catching bids from traders capitalizing on ever tightening spreads.

A tranche of 2.82s in 2025 State of Georgia GO bonds yielded 2.34%, down from 2.579% in trades on Monday.

"Revenue bond and sectors spreads have gotten so tight that some larger local GO deals In some states are actually comparable to major hospital systems across the country," the Virginia trader said. "It's a better value play than to reach for yield on a national hospital system."

Especially in states like California, a general lack of supply has helped high grade credits catch strong bids in recent months.

"[Low supply] is the story of 2014," the trader in Chicago said.

The rally in high grade credits was largely thought to be a delayed reaction to last week's rally in treasuries, said both traders.

With the flood of Puerto Rico restructuring legislation news coming out of the island last week, the market did not have a chance to respond to the treasury rally until now.

"Puerto Rico disrupted the market in general last week such that municipals didn't benefit from the rally in treasuries and is doing a little catching up now," the trader in Chicago said. "Munis are bouncing back now, but the supply is still so terrible."

 

The Palm Springs, Calif. Unified School District benefited from the scarcity in the market, auctioning $109.4 million of general obligation bonds in the competitive market today.

Bids closed at 1 pm eastern time, but both traders anticipated single digit spreads.

"It's very difficult to buy anything in California right now," said the first trader. "It's very competitive and there's nothing left once you buy it."

Bank of America Merrill Lynch won the bid.

The bonds' yields ranged from 0.1% with a 5% coupon in 2015 to 3.69% with a 4% coupon in 2036. The deal was reduced in size from an expected $110 million.

Before the auction investors had predicted there would be heavy competition amount underwriters for the bid.

"Palm springs is a decent name, and a lot of underwriters are stepping up for that," a trader in Florida said.

"I think [there will be competition for the bid]," he added. "It will receive more aggressive bids because it's a school district deal."

A New York trader said that the deal is attractive because "education is always a hot credit, and with the high-net worth retail buyers in California, I have no doubt in my mind this will do well."

Investors also said the transaction's size would bring it an unusual level of interest.

"We're putting in a bid with a syndicate," a west coast trader said.

"It's a good name and it's a good size so I think it will be well received.

The bonds have an optional call at par in 2024, and earned ratings of AA-minus from Standard & Poor's.

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