Market Post: Puerto Rico GO Rally Stems from Primary Activity

Puerto Rico's closely watched Series 2014 general obligation bonds emerged as the top traded security of this week, a testament to the flood of high-yield paper in the primary markets, traders agreed.

The 8s of 2035 issued earlier this year picked up 36 separate round lot trades, those totaling over $1 million, according to data provided by Markit. Yields were range-bound between 9.469% and 9.579% among the round lot trades through the week, according to data provided by Municipal Securities Rulemaking Board's disclosure website, EMMA.

While the yield indicated a three-month high at 9.595% on Friday, traders said the softening was more related to primary market activity than credit-based risk.

"With all the options in the high-yield space this week we needed to make room," said a New York-based trader. "There's only so much high-yield we can hold at a given time, so we had to sell some Puerto Rico to make room."

The week's active primary brought options for traders starved for new inventory for high-yield funds. Traders had their pick from the over $1 billion triple-B San Joaquin Hills Transportation Corridor Agency to the single-A $271 million Detroit Regional Convention Facility Authority deal. In order to make room in their portfolios for the rotation, other high-yield paper - like Puerto Rico - had to be sold off, said the trader.

Rumors surrounding a new Puerto Rico bond issuance may have impacted the rally in paper slightly, but traders said the range-bound nature of the yields indicated the trade activity was primary-market focused.

"If it was solely credit based, you'd see a more dramatic rally than what you've seen this week," said a second New York based trader, pointing to the limited yield movement. Daily highs on the 8s of 2035 climbed from 9.547% to 9.959%, according to EMMA.

"If investors were truly concerned about a credit-based issue, the rally would be in the double digits," said the second trader.

Perhaps adding to the rally was a rumor circulating that Puerto Rico Gov. Alejandro Garcia Padilla may file a bill authorizing a greater-than $2 billion bond this week, as previously reported. Many market participants see the potential $2 billion bond as a negative for Puerto Rico credits.

Municipal scales firmed on Friday morning, with the belly of the curve taking back some of its strength. Yields on bond maturing between 2020 and 2027 fell two to four basis points and yields on bonds maturing between 2028 and 2044 dropped one to three basis points, according to Municipal Market Data's triple-A 5% curve provided by TM3. Yields on bonds maturing between 2015 and 2019 held steady.

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