Puerto Rico debt firmed slightly on Tuesday morning upon news the commonwealth's Senate approved a short-term bond issuance, according to multiple traders. However, Tuesday's light volume showed that market participants' consensus was far from unanimous that the island has seen its last problems.
On Monday evening the Puerto Rico Senate approved the sale of $1.2 in tax revenue anticipation notes, a measure the commonwealth's House had approved last month.
Despite the positive news, only $4 million of Puerto Rico's general obligation 8s of 2035 traded on Tuesday morning, edging yields down a marginal one basis point to 9.21% from 9.22% the day prior in round lot trading, according to data provided by the Municipal Securities Rulemaking Board's disclosure website, EMMA.
"The debt has been fading for the past month or so," said a Midwest trader. "It's relatively good news, but nobody actually knows what's going on and we're all starting to realize that."
The trader was also particularly concerned the amount to be borrowed was increased from an original $700 million to $1.2 billion, indicating that the island was perhaps taking advantage of market conditions in municipals. The front end of the curve has been particularly popular in recent months as investors have been concerned about rising interest rates. The short maturities allow for traders to take a defensive move as a timeframe for interest rate rising emerges.
That mentality has created some of the lowest historical borrowing costs for annual issuers of short-term notes, including Texas, which sold $5.4 billion of tax and revenue anticipation notes in late August, and California which sold $2.8 billion of revenue anticipation notes in early September.
Traders anticipated the impact of the news to be minimal on the island's GOs and only a kneejerk by holders of the commonwealth's troubled PREPA bonds.
"PREPA is very volatile," said a West Coast based trader. "Any rallying in PREPA will eventually settle down and revert back to normal levels."
