Trading activity for Illinois credits in the secondary market remained stagnant Monday as market participants digested a state Supreme Court ruling before the holiday weekend that retiree health care subsidies are protected by the state's constitution.
"There's not much of a reaction to the ruling from Thursday," a New York trader said. "There hasn't been a round lot on Illinois paper. You would think there would be a negative implication, but I haven't seen any."
Investors anticipated a spike in Illinois trading on Monday. Instead volume fell even lower than last Thursday.
"We haven't seen much trading so it's hard to tell," the New York trader said. "I've seen one trade. I haven't even seen much out for the bid indicting that there's not much concern at least for right now."
Trading on all Illinois bonds is 50.9% below its 100-day average, according to data provided by Bloomberg, lower than Thursday when it was 48% below average.
The yield on state of Illinois general obligation pension funding bonds with 5.1s of 2033 fell two basis points to 5.13%, according to data provider Markit.
"There's not a lot of trading going on, and it's not only Illinois GOs, but Chicago GOs as well," a second New York trader said. "They are five to 10 basis points weaker."
Trading on the state's general obligation bonds is 53.4% below its 100-day average, and trading is 84.7% below its 100-day average for city of Chicago bonds.
"It's the first day back from a long holiday weekend; the market hasn't digested everything that has happened with Puerto Rico and Illinois yet," the second New York based trader said. "We should see more of a reaction in the second half of the week."
The municipal market in general was quiet coming off of the holiday weekend, with light trading activity in the primary market as well.
"There's really not much of a reaction today in the muni space," a New York trader said. "Treasuries aren't doing all that much. People are just shaking off the cobwebs from the holiday weekend."
Munis were steady across the board, according to the Municipal Market Data's triple-A scale.
According to the Municipal Market Advisor's 5% triple-A scale, the 10-year benchmark and the two-year note were steady at 2.35% and 0.32%, respectively. The 30-year yield rose one basis point to 3.51%.
Treasuries were mixed Monday, with the 30-year yields slipping four basis points to 3.44% and the 10-year benchmark sliding three basis points to 2.62%. The two-year note rose one basis point to 0.52%.
Puerto Rico's new debt law is a credit negative for financial guarantors such as Assured Guaranty Ltd., MBIA Inc., and Radian Group Inc., which have exposure in the territory, Moody's Investors Service said.
The rating agency predicts that "further deterioration in Puerto Rico's credit profile would only increase investors' concerns."
The Puerto Rico sell-off may inject volatility into the market this week, market participants said.
"Market participants should be aware of potential headline-driven broad market volatility from Puerto Rico's challenges in the coming weeks," John Dillon, chief municipal bond strategist and managing director at Morgan Stanley, wrote in a report released on Thursday.
The weekend of June 28, Puerto Rico enacted a law that allows the island's public corporations to restructure debt.
Moody's downgraded the commonwealth's outstanding $14.4 billion GO debt to B2 from Ba2 on July 1, because of the new law. Moody's also downgraded a slew of Puerto Rico agencies and public corporations, dropping the commonwealth's Sales-Tax Financing Corp.'s senior and subordinate lien bonds to Ba3 and B1, respectively.
The Puerto Rico Electric Power Authority was downgraded to Caa2 from Ba3, and many other Puerto Rico agencies were also lowered.
Yields on Puerto Rico GOs, COFINA, and PREPA bonds rose after the downgraded, and the yields for bonds from the commonwealth's $3.5 billion March issuance jumped to their highest level ever.
"I would venture to stay an arm's length away from Puerto Rico debt until the issues clear up," a trader in New York said. "We won't know its impact on the market until fund flows come out this week."
Dillon wrote in the report that if there is broader market volatility from Puerto Rico issues, in the absence of rising U.S. Treasury yields, such volatility may be an opportunity for investors to add exposure to non-Puerto Rico municipals.
"However, headline-driven muni risk and UST-driven interest rate risk may facilitate a longer lasting span of price erosion that would need to be monitored for appropriate entry points," he wrote. "Our base case remains one of rising interest rates (eventually). Our target maturity range is 4 to 9 yrs; we prefer above-market coupon securities."
Volume is scheduled to pick up this week, but is still lower than June's levels. Volume is expected total $3.5 billion, compared to $2.8 billion the week before.
"The market is looking for new credits, so new structures will do well," a trader in Chicago said.
Barclays Capital will bring $250 million of Connecticut Health and Educational Facilities Authority revenue bonds on Wednesday. The deal is rated Aaa by Moody's Investors Service and AAA by Standard & Poor's.
Citigroup Global Markets will price $250 million of Indiana Finance Authority private activity bonds. The deal is rated BBB-minus by S&P and BBB by Fitch Ratings.
Morgan Stanley will issue $238 million of Louisiana gasoline and fuel tax revenue refunding bonds on Thursday. The deal is rated Aa1 by Moody's and AA by Standard & Poor's.
Raymond James & Associates will issue a three part deal totaling $157.1 million of Massachusetts Port Authority revenue refunding bonds to the market on Wednesday. The deal is rated Aa3 by Moody's, AA-minus by S&P and AA by Fitch.
"The Mass. port deal is going to be the highlight of the week," the first New York trader said.
In the competitive market, the Massachusetts School Building Authority will auction $300 million of bond anticipation notes on Thursday. The deal is rated MIG1 by Moody's, SP-1-plus by S&P and F1-plus by Fitch.
The state of Wisconsin will sell $254.8 million of general obligation bonds on Wednesday.
The Florida Department of Transportation will auction $240 million of turnpike revenue bonds.
