Worry about Greece fueled a flight to safety buy in bonds on Monday, pushing up prices of both U.S. Treasuries and municipal bonds. Traders said yields on some top-rated municipals fell six basis points as uncertainty over Puerto Rico added to investors' general unease.
Market volatility allowed the biggest muni issuer of the week to jump in and sell its almost $800 million deal a day ahead of schedule, taking advantage of the falling yields.
"With the negotiations between Athens and its creditors breaking down over the weekend in favor of bank closures, capital controls, and a July 5th referendum vote presumably on whether or not to accept austerity measures, money was quickly exiting global stock markets and pouring into bonds," Gregory Saulnier, research analyst at Municipal Market Data, wrote in a Monday comment.
The yield on the 10-year benchmark muni general obligation closed down six basis points to from 2.28% on Friday, while the yield on the 30-year GO was off six basis points to 3.28% from 3.34%, according to the final read of Municipal Market Data's triple-A scale. Some shorter-term maturities were unchanged to down as much as five basis points.
Treasury prices were higher on Monday with the yield on the two-year Treasury note falling to 0.64% from 0.67% on Friday, while the 10-year yield dropped to 2.34% from 2.47% and the 30-year yield decreased to 3.10% from 3.24%.
The 10-year muni to Treasury ratio was calculated on Monday at 98.3% versus 93.4% on Friday, while the 30-year muni to Treasury ratio stood at 106.1% compared to 102.3%, according to MMD.
The stock market also took a big hit, with equities trading sharply lower. Near the close, the Dow Jones Industrial Average was down almost 320 points, the Nadaq was off about 120 points and the S&P 500 dropped nearly 40 points.
Puerto Rico GO Prices Fall on Reports of Debt Distress
Prices of Puerto Rico debt fell on Monday after a published report quoted Gov. Alejandro García Padilla as saying the commonwealth cannot pay its $72 billion in debt.
The governor said the commonwealth would likely seek significant concessions from creditors, which could include putting off some debt payments for as long as five years, the New York Times reported.
Puerto Rico commonwealth Series 2014A general obligation 8s of 2035 were trading as low as 68.50 cents on the dollar on Monday, according to the Municipal Securities Rulemaking Board's EMMA website, a high yield of 12.254%. There were 74 trades totaling $130 million on Monday.
On Friday, the GOs traded as low as 76.75, according to EMMA, a high yield of 10.874%. There were 19 trades totaling $22 million on Friday.
The Puerto Rico commonwealth 1998 public improvement 6s of 2016 traded as low as 97.275 on Monday, according to EMMA, a high yield of 8.916%. There were 93 trades totaling 2.25 million on Monday. On Friday, the bonds traded as low as 102.75, a high yield of 3.184$, There were only two trades for $30,000.
"The news is negatively affecting both GO and revenue paper," a Markit analyst told The Bond Buyer.
He cited the Puerto Rico Public Buildings Authority's 2012 Series U government facilities revenue refunding 5 1/4s of 2042, which were trading in the 55 range on Monday after being evaluated at 60 on Friday. Markit also reported the commonwealth's Series 2012A GO public improvement refunding 5s of 2041 were trading at 59.25, compared to 64 on Friday.
"The facts are the situation isn't looking good, the pending PREPA July 1st default looms on the market, the possible restructuring of the Government Development Bank debt and the possible postponement of GO set-asides have sent alarms to GO bondholders," J.R. Rieger, Global Head of Fixed Income at S&P Dow Jones Indices, said in a market comment. "Last week, the GO debt had plumbed new depths helping to record a negative 5% month-to-date return for the S&P Municipal Bond Puerto Rico General Obligation Bond Index."
Also last week, the average yield of bonds in the broader S&P Municipal Bond Puerto Rico Index were at a record high.
Some analysts said worry over Puerto Rico's woes spilling over into the larger muni market was unwarranted.
"Fears of credit contagion from Puerto Rico are unfounded, regardless of what media headlines may convey," Municipal Market Analytics wrote in a comment on Monday. "The commonwealth's reckless use of debt-financed budgets is, in its breadth and depth, unique among U.S. municipal issuers. State and local credit quality has been steadily improving in the last 12 months."
But MMA did say some holders of Puerto Rico debt may be in for a nasty surprise if they haven't been doing their credit homework.
"The governor's statements that the commonwealth's debts are 'unpayable' will likely come as a surprise to many Puerto Rico GO/COFINA bondholders who have willfully ignored the inevitability of a painful debt restructuring across all Puerto Rico securities," MMA said.
Moody's Investors Service said it was assessing what, if any, affect the latest news will have on the broader municipal market.
"Assessing how any Puerto Rico defaults will affect the municipal bond market overall is difficult at this stage," according to Ted Hampton, Moody's Vice President. "Past defaults by municipalities including Detroit and Jefferson County, Ala., had little broad market effect."
He added that while the size of Puerto Rico's default would be larger Detroit or Jefferson County, "The vast majority of Moody's rated municipal credits have strong ratings and are unlikely to be affected by Puerto Rico's debt restructuring."
Primary Market
New issue volume for the week totals $3.26 billion, consisting of $2.83 billion of negotiated deals and $432.5 million of competitive sales. The municipal market will be closed on Friday for the July 4th holiday. There will be no early close on Thursday.
Citi priced the largest deal of the week, the Texas Transportation Commission's $786.93 million of state highway fund's first tier revenue refunding bonds, for institutions on Monday. The deal was originally expected to price on Tuesday for institutions. The issue was initially priced to yield 0.87% with a 3% coupon in 2017 to 2.75% with a 5% coupon in 2026. The bonds are rated triple-A by Moody's Investors Service and Standard & Poor's.
Morgan Stanley is set to price the Metropolitan Washington Airports Authority's $350 million of Series 2015 B, C and D airport system revenue and refunding bonds on Tuesday. The issue is rated A1 by Moody's and AA-minus by S&P and Fitch Ratings. Morgan Stanley is also expected to price the state of Arizona's $168 million of Series 2015 refunding certificates of participation on Tuesday. The COPs are rated Aa3 by Moody's and AA-minus by S&P.
Jefferies is slated to price the Jets Stadium Finance Issuer 2015, LLC's $147 million of Series 2015 taxable weekly mode variable-rate demand notes on Tuesday. The notes are rated VMIG1 by Moody's and A1 by S&P.
Wells Fargo Securities is set to price Clark County, Nev.'s $102 million of revenue refunding bonds for the Las Vegas-McCarran International Airport on Tuesday. The bonds, initially structured as serials running from 2019 through 2027, are rated A1 by Moody's and A-plus by S&P.
The only competitive bond sale over $100 million will take place on Tuesday, when the North Dakota Public Finance Authority offers $125 million of Series 2015A revolving fund program bonds. The last time the PFA competitively sold comparable bonds was on April 23, when Citi won $25.62 million of Series 2015B capital financing program bonds with a true interest cost of 3.33%.
Prior Week's Actively Traded Issues by Sector
Revenue bonds comprised 54.90% of new issuance in the week ended June 26, up from 53.86% in the previous week, according to Markit. General obligation bonds comprised 36.54% of total issuance, down from 38.03%, while taxable bonds made up 8.56%, up from 8.11%.
Some of the most actively traded issues last week were in New York, Vermont and Mississippi names, according to Markit.
In the revenue bond sector, the New York City Transitional Finance Authority's BARB 4s of 2044 were traded 65 times. In the GO bond sector, the Vermont and State Agricultural College 4s of 2040 were traded 52 times. And in the taxable bond sector, the Mississippi Home Corp. single-family mortgage revenue 3.05s of 2034 were traded 13 times, according to Markit.
