In a day marked by slow trading and a lack of substantial new issuance, municipal market participants on Tuesday focused their attention on a conference call with the Government Development Bank of Puerto Rico.
Puerto Rico bonds were some of the most actively traded securities on the day, with its Sales Tax Financing Corp., or COFINA bonds the most actively traded.
Trading on all muni bonds was down 32.8% as of press time, while Puerto Rico bond trading was down just 0.7% compared with average volumes around 3 p.m. eastern time. The commonwealth accounted for 6.32% of bond trades on the day, the fifth-most active region in the market, according to data from Bloomberg.
"With all the uncertainty out there it's understandable that there would be some volatility in the market today," a trader on the West Coast said in an interview.
The GDB hosted an investor conference call Tuesday afternoon to discuss the commonwealth's upcoming bond issue, rating downgrades and financial progress. The call began at 2 p.m. ET and was a popular event for many participants, traders said.
"There's still a lot of talk about if the new deal going to drive prices down," the trader said. "If they can successfully market it, the market could potentially rebound, because you take a lot of pressure off by giving some liquidity they need for the next several months, and gives them some time to work on several other things to bring the budget into balance and stimulate the economy."
The island will sell about $2.8 billion of bonds in March, the island's government said in the webcast. The deal will consist of a mix of general obligation, Public Building Authority and appropriation-supported bonds.
The sale will refinance existing obligations and address liquidity concerns, along with a $650 million operating deficit this year, the government said. All three rating agencies dropped Puerto Rico's commonwealth GOs to junk levels this month.
Most dealer-to-client trades of Puerto Rico bonds were sells, the data showed, with 63% of COFINA trades sells. Yields on Puerto Rico bonds seemed to firm throughout the broadcast, according to market observers.
"This financing should also help COFINA bonds since the deal will be GOs," another trader on the West Coast said. "There will be less investment-grade paper floating around, as people sold assuming a COFINA deal was in the works."
The Puerto Rico Sewer Authority, or PRASA, bonds saw the biggest jump in volume, trading at levels 170% above normal at press time.
"When the deal is behind us Puerto Rico bonds will move up strongly," the trader said. "Fear has been built up for eight months for essentially a non-event. I am confident that even if they do the entire $2.8 billion deal it will easily be handled by the market."
Puerto Rico first announced last week its plans to issue general obligation bonds in the near future. The bonds will be managed by Barclays, Morgan Stanley and RBC Capital Markets. A failure by the government to access capital markets could hurt the rest of the municipal market, some traders said.
"All these guys who have it in their funds, with Puerto Rico coming out of the indexes now, if they can't get a deal done, it starts sliding, some of these guys may start to cut and run," a trader said. "It could be a snowball effect on the market; they could look to sell other things as well."
Others still point to the commonwealth's problems that are specific to the island, saying the impact on municipal bonds as a whole may be tempered.
"There's a lot of recognition that many issues of the commonwealth are specific to the commonwealth," another trader said. "Declining demographics, declining population, those are very specific commonwealth issues that have added import on their financial position."
The fundamental issues the island faces are not systemic to the rest of the market, the trader said.
"The big issue is going to be a function of liquidity with respect to the additional borrowing that's so necessary to calm the markets right now," the trader said.
Market participants will be attuned to whether or not the size of the upcoming deal is announced, as well as the interest rates at which the bonds will price, according to traders.
"It's not going to be prevailing market rates for a BBB or BB-type security, in order to entice the level of crossover and hedge fund types that will be necessary to clear the market," the trader said. "It will be higher levels than one would typically anticipate."
The rest of the municipal market crept into the week Tuesday morning following a three-day weekend and light trading activity on Friday.
"There's very little out there and it's very quiet — maybe up slightly on the long end because there's nothing going on," a trader in New York said. "I think we could use some supply to be quite honest. Some of these guys on the buy side don't really know what the heck to do with themselves."
Municipal mutual funds reported $82.1 million of net inflows in the week ended Feb. 12, bouncing back from a $227.3 million outflow the week before, Lipper FMI reported Thursday.
"I think equities ran down so much that some people are just taking that off the table and looking at munis," the New York-based trader said.
Yields according to Municipal Market Data's triple-A scale were steady on the short end Tuesday morning, with bonds maturing from 2018 to 2038 falling up to one basis point. Bonds beyond that fell two basis points. The benchmark 30-year Treasury yield was up one basis point to 3.69%, while the 10-year was at 2.72%. The two-year yield was 0.32%.
