The market was unperturbed by Fitch Ratings' sharp downgrade of the Puerto Rico Sales Tax Financing Corporation's debt to BB-minus from AA-minus.
Yields on the COFINA 5s of 2040 were 7.44% on Thursday morning, three basis points stronger than the 7.47% posted Wednesday, according to Bloomberg data. Yields on the corporation's 5.375s of 2038 were 8.93%, 17 basis points lower than the 9.1% yield they reached the day before.
"The downgrade should be expected, rating agencies are a lagging indicator," a trader in Chicago said.
Fitch downgraded the $6.7 billion of COFINA senior lien sales tax revenue debt late Wednesday afternoon as part of a mass downgrade of Puerto Rico debt.
"This is not surprising, Puerto Rico credits are falling left and right," a trader in New York said.
The rating agency also dropped the commonwealth's general obligation bonds to BB-minus from BB, $3.4 billion of Puerto Rico Aqueduct and Sewer Authority revenue bonds (senior lien) to B-plus from BB-plus and its $658 million guaranty revenue bonds to BB-minus from BB.
"The rating actions follow passage of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which establishes a restructuring regime for public corporations that may become insolvent," Fitch wrote in the report. "The Act contemplates two procedures for addressing debt obligations. While they are intended to restore solvency over the long-term, both procedures entail debt restructuring that would trigger suspension of debt payments and preclude the timely payment of principal and interest during the pendency of the proceedings."
Fitch's decision to lower the ratings follows a similar wide-spread downgrade of Puerto Rico debt by Moody's Investors Service on July 1. Moody's also cited the commonwealth's restructuring bill as the reason for the downgrade, but acted almost immediately after the restructuring law was passed the weekend of June 28.
Trading on COFINA bonds still remains high, with trading levels 200.9% over the 100-day average, according to Bloomberg data.
"I think this Puerto Rico situation will be ongoing, it will be around for a while," the trader in Chicago said. "[Especially] when you think about Detroit and how long that took."
On Thursday, yields on the COFINA 5s in 2040 had risen 106 basis points from 6.38% on June 30, the Monday after the restructuring law was passed. The 5.375s of 2038's yields increased by 135 basis points from 7.58% in that period.
Municipal bond yields strengthened on Thursday morning, after the Federal Open Market Committee meeting minutes released Wednesday afternoon showed the Federal Reserve's tapering will likely be completed in October, assuming economic conditions allow, rather than in December. There had been some question as to whether the Fed would end by cutting $15 billion in October or cut $10 billion in October and the final $5 billion in December.
"The threat of the taper was actually bigger than the taper," the trader in Chicago said. "It's difficult to know when Fed will raise interest rates, but it will be a significant event when it does happen."
Yields for bonds maturing in seven years fell by as much as one basis point and declined by as much as two basis points for bonds maturing in eight to 30 years, according to Municipal Market Data's triple-A scale.
Munis had been selling off for the past six days, with the two-year rising by one basis point to 0.32%, the 10-year by 12 basis points to 2.37%, and the 30-year by 11 basis points to 3.52% from June 30 to Wednesday, according to Municipal Market Advisor's data.
In the competitive market, the Massachusetts School Building Authority auctioned $300 million of bond anticipation notes on Thursday, the largest deal in the competitive market. Bank of America Merrill Lynch won $150 million with a 5% coupon and a 0.09% yield. JPMorgan won part of the deal with a 1% coupon and a 0.1% yield, Bloomberg reported. Further details were not available.
The deal is rated MIG1 by Moody's, SP-1-plus by S&P and F1-plus by Fitch.
"That deal will be bought up quickly, especially since there is not much to look at this week, it will come at pretty tight spreads," a trader in the Midwest said Wednesday.
Overall though, traders said they are not really concentrating on the deals coming to market this week. The trader in Chicago said this week is "pretty thin on issuance."
"Sometimes watching the muni market is like watching grass grow," a trader on the west coast said.
Morgan Stanley is expected to price $238 million of Louisiana gasoline and fuel tax revenue refunding bonds on Thursday. The deal is rated Aa1 by Moody's and AA by Standard & Poor's.
RBC Capital Markets is expected to price $125 million of New Jersey Turnpike Authority revenue bonds. The deal is rated A3 by Moody's.
Citigroup Global Markets is expected to price $119.9 million of Delaware River Bay Authority revenue bonds. The deal is rated A1 by Moody's and A by S&P.
