Municipal bonds strengthened along with Treasuries Friday as concern over the health of a big Portuguese lender made its way into the U.S. market, sending investors to the safety of U.S. fixed income securities.
Treasuries rallied, with the 10-year benchmark dropping 11 basis points to 2.52% and the 30-year yield fell 10 basis points to 2.51%. The two-year note slipped 0.46%.
The reaction in munis was more muted, as the market completed a week in which Puerto Rico credit concerns spurred yields higher. Yields on bonds maturing in six to 29-years fell as much as one basis point Friday, according to the Municipal Market Data's triple-A scale. Yields on bonds maturing in five-years slipped as much as two basis points, while yields on bonds maturing in one to four-years were steady.
According to the Municipal Market Advisor's 5% triple-A scale, the 30-year and the 10-year benchmark yields slid one basis point to 3.50% and 2.34%, respectively. The two-year note was steady at 0.32%.
Muni 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, after inflows of $193.6 million the week before, according to Lipper FMI.
Market participants blamed Puerto Rico's sell-off.
Earlier in the week, the Puerto Rico Electric Power Authority announced it had received an extension for a $10 million payment to Citigroup to July 31 from July 3. Market participants said this bought the authority some time to get its finances in order, but revealed how deep-seated PREPA's liquidity issues are.
PREPA bond trading activity spiked the day after the announcement. Investors said PREPA bonds weren't having problems getting bids, but prices might come down to a level at which sellers might not want to sell.
Puerto Rico woes have also sent stock prices for MBIA Inc., the parent of National Public Finance Guarantee, Assured Guarantee Ltd., and Ambac Financial Group Inc. lower on concern over the bond insurers' exposure to the island's credits after the government passed a law allowing public corporations to restructure their debt. Five-year credit default swap spreads for bond insurers, Assured and MBIA, widened due to similar concerns. Officials of the insurers said the concerns were overblown.
On Wednesday, Fitch Ratings downgraded a raft of Puerto Rico credits, highlighted by a cut in the rating of $6.7 billion of Puerto Rico Sales Tax Financing Corporation outstanding senior lien sales tax revenue debt to BB-minus from from AA-minus. Standard & Poor's downgraded PREPA bonds to B-minus.
