Puerto Rico turmoil continued to dominate headlines this week, starting on Monday when a spokeswoman for the Puerto Rico Electric Power Authority announced that PREPA negotiated with some of its creditors and had extended the timeframe on some of its bank payments. PREPA notably extended a $10 million July 3 payment to Citigroup to July 31.
Market participants said this does buy the authority some time to get its financials in order, but reveals how deep-seated PREPA's liquidity issues are.
Trading in PREPA bonds spiked the day after the announcement, with huge blocks of PREPA bonds out for the bid. Investors said PREPA bonds were not having problems getting bids, but prices might come down to a level at which sellers might not want to sell.
Also following the downgrades by Moody's Investors Service earlier this week, stock prices for MBIA Inc., the parent of National Public Finance Guarantee, Assured Guarantee Ltd., and Ambac Financial Group Inc., dropped.
Some market participants believe the steep decline isn't life-threatening to the bond insurers.
The total net par outstanding exposure of Puerto Rico debt by the bond insurers is about $15 billion as of March 31. This includes $7.5 billion of public corporation debt subject to the new law.
Analysts predict the financial guarantors may be forced to raise capital if the debt is restructured under the new debt law.
Puerto Rico's debt distress has also widened five-year credit default swap spreads for bond insurers Assured and MBIA, according to Fitch Solutions.
Officials at the insurance companies said they are optimistic the U.S. territory will devise a solution to counteract the potential default.
On Wednesday, Fitch Ratings did a mass downgrade of Puerto Rico debt. The rating agency's downgrade of $6.7 billion of Puerto Rico Sales Tax Financing Corporation outstanding senior lien sales tax revenue debt from AA-minus to BB-minus stood out the most.
The market did not react much to the latest downgrades, saying that Puerto Rico debt is being downgraded left and right, and Fitch's move was expected.
Standard & Poor's also downgraded PREPA bonds to B-minus on Wednesday.
Market participants said they were not focusing much on the deals this week, because there were no large, big-name deals. The largest deal of the week, from Massachusetts School Building Authority, totaled only $300 million. Portions of the deal were won by JP Morgan Chase, Bank of America Merrill Lynch, and U.S. Bancorp.
Investors said the bonds were heavily bid for because buyers are looking for somewhere to park their cash, and because Massachusetts is a strong name.
Other than the Massachusetts deal, many issuances were fairly small and were downsized slightly this week during the market's sell-off. The Indiana Finance Authority's private-activity I-69 deal's total was also decreased slightly to $243 million when it was priced by Citi from an expected $250 million.
The Massachusetts Port Authority revenue refunding deal priced on Wednesday by Raymond James & Associates came in at $250 million from an originally scheduled $251.7 million.
The bonds were rated triple-B-minus by S&P and triple-B by Fitch.
"That Indiana transaction, it was triple-B and was well received," a trader in Chicago said. "There was a lot of investor appetite. It is a yield diversifier so it is a different transaction than buyers typically see in yields, so it was very attractive to investors."
Munis mostly strengthened Friday, with yields on bonds maturing in seven to 29 years falling as much as one basis point, according to the Municipal Market Data's triple-A scale. Yields on bonds maturing in one to four years and with yields maturing in six-years were steady.
Treasuries strengthened Friday, with the 10-year benchmark dropping 12 basis points to 2.51% and the 30-year yield falling 10 basis points to 2.51%. The two-year note slipped 0.46%.
Municipal bond funds reported outflows for the first time in 10 weeks.
Fund flows came in at negative $790.3 million for the week ending July 9, down from inflows of $193.6 million the week before, according to Lipper FMI.
Market participants blamed Puerto Rico's sell-off for outflows. These fund flows show the ongoing Puerto Rico crisis' true impact on the rest of the municipal bond market, they said.
High yields funds also reported strong outflows of $691.1 million after inflows of $5.7 million last week.
The commonwealth's general obligation bonds and bonds issued by Puerto Rico organizations began selling off June 28, when Puerto Rico Gov. Alejandro García Padilla signed into law a bill that allows its public corporations to restructure their debts. Credit rating agencies quickly downgraded Puerto Rico debt or put the debt on negative credit watch.
Munis also began selling-off after the restructuring law was passed, with yield rising across the curve from July 1 to July 9.
John Dillon, chief municipal bond strategist and managing director at Morgan Stanley, wrote in a report released on Wednesday that Puerto Rico troubles may continue to plague the muni market.
"Market participants should be aware of potential broad market volatility from Puerto Rico's impact in the coming week," Dillon said.
Fund flows for all municipal bond funds had hit low levels last week, but market participants attributed that to the shortened week leading into the July 4th holiday. Inflows have remained strong throughout the second quarter, and for most of the year.
"Should this summer turn out to be uneventful, we would expect munis to outperform into the heart of the summer," Dillon wrote. "Conversely, our larger concern would be for a combination of sharply rising yields and broader muni volatility stemming from Puerto Rico valuations. Without upward UST rate movement, any potential market disruption from Puerto Rico's impact may be short-lived and represent an opportunity to acquire non-PR bonds."
The largest deal next week is $1.4 billion of California Bay Area Toll Authority revenue bonds.
The New York City Transitional Finance Authority will sell $675 million in the negotiated market and $125 million in the competitive market.
Colorado will bring the largest deal in the competitive market next week: $500 million of tax and revenue anticipation notes.
