Market Post: Has Puerto Rico Hit a Top?

Bids for Puerto Rico debt have begun to taper off on Wednesday morning as hedge funds that own the debt contemplate whether a "top" is near.

Prices for the island's public power authority, PREPA, rose as high as 54.25 in odd-lot trading on the authority's 7s of 2043 Wednesday morning, according to Municipal Securities Rulemaking Board's disclosure website, EMMA, still catching strong bids stemming from last week's letter of credit extension announcement.

While the price continues to rise, bids for the paper are becoming less frequent, said a New York based trader.

"Hedge funds are hearing that this might be getting to be the time to get out," the trader said. "Last week was good news, but those prices are a little lofty."

PREPA activity has been dominated by hedge funds and other alternative investors buying up odd lots from retail to increase their positions in the public corporation, which is nearing a historic restructuring. The debt has rebounded significantly since the buy-side's entry point, when the paper plummeted to the mid-30 cents on the dollar.

Those buy-side players may be delaying increasing their positions as they determine whether this point may be the maximum return level, the New York trader said.

Meanwhile, trading volume on the commonwealth's general obligation bonds have stalled as well. By midday Wednesday, just $9.99 million of the 8s in 2035 had been traded after $61.8 million traded on Tuesday, and $45.98 million traded on Monday, according to EMMA.

Yields on the 8s of 2035 have continued to rally, getting as low as 9.025% on Wednesday in round lot trades.

Traders agreed that any strength seen in the commonwealth's GO has been piggybacked off of PREPA's announcement late last week.

The overall municipal market was mixed Wednesday morning, according to the Municipal Market Data triple-A 5% scale. Bonds maturing through 2015 were unchanged while those maturing between 2016 and 2019 fell up to two basis points. Bond maturing between 2020 and 2044 showed slight weakness, rising up to one basis point.

The Treasury market weakened in the front end of the curve as the long end held steady on Wednesday. The two-year note and 10-year each rose two basis points to 0.45% and 2.42%, respectively, while the 30-year held steady at 3.22% compared to Tuesday's market close.

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