Market participants are zeroing in on a potential default by the Puerto Rico's Electric Power Authority amid light trading to kick off a protracted holiday week.
Standard & Poor's placed Puerto Rico's general obligation debt along with Puerto Rico Aqueduct and Sewer Authority bonds on negative watch earlier Monday, after Gov. Alejandro Garcia Padilla signed a debt restructuring bill this past Saturday.
"People are keeping track of what's happening in Puerto Rico; how they're planning on restructuring the debt," a New York trader said. "There are a couple of conference calls going on right now to discuss it. P.R. paper is pervasive to the market."
The situation in Puerto Rico and how that impacts the territory's paper has become a big concern for investors.
"We'll have to see how Puerto Rico news plays out," a second New York trader said. "It can cause the market to prevail. P.R .can upset the general direction of the market."
According to the Janney Daily Fixed Income Strategy report, "If Puerto Rico's economy continues to shrink, the island's large debt load may overwhelm issuers beyond the public corporations."
Investors predict the strong tone of the municipal market will continue throughout the shortened week as Janney reports supply to be at predictably weak levels.
"With the Fourth of July holiday coming up, it is likely many buy-side decision makers will be exercising their American right to pursue happiness, especially considering the early close on Thursday July 3rd," Janney reported.
Market participants are anxious about what the jobless claims report will reveal at the end of the week, following the release of the first quarter gross domestic product data the week prior. The GDP was revised down 1.9 points to its biggest loss since the first quarter of 2009, a 2.9% contraction.
"People are waiting to see what the numbers are on Thursday," a New York trader said. "They're coming out a day early because of the Fourth of July week. The numbers about the growth of the economy have been disappointing. People are not sure if the economy has been this weak or if it's just the season."
Munis were steady across the board on Monday, according to the Municipal Market Data's triple-A scale, as the third quarter of the fiscal year came to a close with no signs of the United States' economy moving at a faster pace.
According to the Municipal Market Advisors 5% triple-A scale, muni yields were steady across the curve with the two-year note at 0.31%, the 10-year benchmark at 2.25% and the 30-year yield at 3.43%.
Demand for munis still remains strong, with inflows for all municipal bond funds rising to $233.5 million for the week ending July 18, from $147.7 million the week before, according to Lipper FMI.
"There's always a tug of war going on with people looking for bonds and there being a lack of supply," a New York trader said.
The $333 million offering of Dallas Independent School District unlimited tax refunding bonds from JPMorgan is expected to price this week stand out to investors.
The bonds are appealing because they are education bonds from a Texas credit, market participants said.
"From a credit standpoint, Texas school district deals will get attention," a trader in Dallas said.
The bonds earned a Aa1 rating from Moody's Investors Service.
"[Texas bonds are] one of the better values in the market at any given time. I would have no problems putting [Texas] credit in any client's portfolio."
The trader in Dallas also mentioned that the market and Texas retail investors like to buy education bonds because they feel the bonds serve more of a purpose than straight Texas GOs.
Houston will bring $101.2 million of Higher Education Finance Corporate revenue and refunding bonds on Tuesday.
"It's a slow week, but there's a charter school deal in Harmony, Texas," the second New York trader said. "It has the state public school fund backing it up so there could be a little yield there."
Other than the two Texas deals on the negotiated side of the market the Lancaster Port Authority, Ohio, is scheduled to issue $321.6 million gas supply revenue refunding bonds next week. RBC Capital Markets will price the deal.
The Los Angeles Department of Water and Power will come to market with $200 million of revenue bonds on Tuesday.
"There are water and power bonds coming from L.A. that may present an opportunity for yield," a second New York trader said.
For competitive issuance, the Alabama Public School Authority will auction $555 million capital improvement refunding bonds this week; the bonds received a rating of Aa1 from Moody's, AA from S&P and AA-plus from Fitch.
Treasuries mostly strengthened Monday, with the 30-year yield and the 10-year benchmark falling two basis points each to 3.35% and 2.52%, respectively. The two-year note was unchanged at 0.47% from Friday's market close.
Secondary market trading showed mostly strengthening, according to data provider Markit.\ California 5s of 2043 fell four basis points to 2.60%, and Illinois 5.1s of 2033 slipped two basis points to 5.08%. Texas Department of Transportation Commission Highway Fund 5s of 2034 slid one basis point to 3.12%, while New York Metropolitan Transportation Authority o5s of 2023 dipped one basis point to 2.76%.
