With issuance in the municipal marketplace at its lowest since 2011, investors are increasingly looking to the planned deal by the government of Puerto Rico for relief.
New issue supply has had the second-slowest start to a year since 2005, according to data from Bloomberg and The Bond Buyer. Year-to-date issuance is just $29.29 billion, compared with $42.73 billion by this time last year. In 2011, issuance by Feb. 24 hit a 10-year low, with just $22.05 billion of bonds sold.
The 30-day visible supply measured by The Bond Buyer is just $5.90 billion, 2.7 billion below the one-year average. Including as much as $3 billion of Puerto Rico general obligation bonds scheduled for some time in March, visible supply is the highest since Dec. 12, 2013.
The injection of Puerto Rico bonds, which have rallied since the commonwealth's downgrade, could be the jolt the municipal market needs, analysts and traders said.
"Removing uncertainty from Puerto Rico is beneficial to Puerto Rico but also could have a positive effect on the whole market in general for other high-yield names," Mikhail Foux, a strategist at Citi, said in an interview. "Some of the shorter-dated bonds could really outperform the market."
Puerto Rico bonds have rallied since the commonwealth's general obligation bonds were downgraded to junk by Moody's Investors Service, Standard & Poor's and Fitch Ratings earlier this month. The spread of Puerto Rico bonds to the triple-A yield on five-year general obligation bonds has fallen 145 basis points this month, while the same spread on 10-year maturities has narrowed 80 basis points.
The island's bonds have been a top-five most actively traded municipal security regularly this month, ending Monday the fifth-most actively traded municipal region. Trades on the bonds were 51% dealer buys.
The most popular Puerto Rico bonds Monday were the island's 5.25% coupon Highway Transportation Authority bonds maturing in 2014, with an average yield to maturity of 10.35%, at press time.
"You basically think that if the deal gets done then all of a sudden you remove the ambiguity and problems in the near term, making those short-term bonds look attractive," Foux said. "The ones that have the weaker structures, those are the best ones to have if you're going to invest there."
Traders said supply has remained low throughout 2014 as the economic picture remains dubious and issuers wait to see how budgets allow for infrastructure projects. Largely negative news and a spotlight on Puerto Rico have also weighed on the market. A successful deal could buoy the market, some said.
"I think it could be a sign of health to the market, if it meets and does well and if the rating gets improvement, the value of the tax exemption could get attention," one New York-based trader said in an interview.
The deal is likely to attract hedge funds and other cross-over buyers that seek high yield investments, traders agreed. Sustained rallying by the bonds could bring yields somewhat richer than expected, one trader said.
"The island's personnel have said some really good stuff, the spreads have narrowed dramatically from the downgrade throughout the curve," the New York-based trader said. "We've had inquiries for specific Puerto Rico names."
Puerto Rico's deal could reach up to more than $3 billion, the island has said. Combined with several other large deals from well-known issuers, the supply picture could improve over the next month, the trader said.
"If you look at things that are coming in the next 30 to 60 days, two issues out of Connecticut, a Miami airport deal, it's an uptick from what we've seen," the trader said. "But there are no other blockbusters other than that Puerto Rico deal."
Muni trading volume was 17% below the average volume by midday Monday, according to Bloomberg data, as issuers failed to offer any large new deals.
"February has been a grueling month, with extremely low primary market issuance and uncertain economic trends hampering trading ?ow and price volatility," Municipal Market Advisors said in a report Monday. "Not only does this deprive the market of new product and related P&L, but also of price discovery and dealer investment in market making to facilitate secondary trading."
Transportation bonds were trading at levels 31% higher than the daily average at press time, while tax-backed bonds were trading 10.0% more frequently. All other bond types were trading at smaller volumes than normal.
After a week with just $1.89 billion of new issuance, the municipal market opened slowly Monday as investors still had little to look forward to in the way of new money bonds.
Potential issuance in the coming week is estimated at $2.76 billion, according to data from Ipreo and The Bond Buyer.
"We're due one day to have some excitement in this market but it's not today," one trader in North Carolina said in an interview. "Definitely a quiet start today and it doesn't seem like there are a lot of brokers in today. There's no supply, so we're still in check there."
The largest deal of the week, $270 million of Barclays Capital-led tax allocation refunding bonds for the Inland Valley, California Development Agency, was scheduled for Monday. $169.5 million of the bonds are federally taxable. Pricing information wasn't available.
Later in the week, California School Cash Revenue program will issue $200 million of Piper Jaffray-led bonds on Tuesday. Barclays is expected to bring $193 million of New Jersey Educational Facilities bonds on Thursday.
In the competitive market, Delaware plans to issue $227 million of AAA-rated general obligation bonds on Thursday. On Tuesday, the California Department of Water will issue $165.3 million of AAA-rated revenue bonds.
"The economy is kind of sputtering along, so with the new money stuff, from a political standpoint, they're less likely to issue more debt," the trader said. "Issuers probably want to wait for the economy to do better for new projects to pick up."
Yields on bonds were mostly steady Monday, according to Municipal Market Advisors. Bonds maturing in 2028 and 2029 lost one basis point in yield.
Treasury yields were mostly unchanged Monday, with the 30-year benchmark Treasury yield at 3.70%, and the two-year yield at 0.33%. The 10-year yield remained at 2.74%.
