The tax-exempt market finished on a quiet and steady note Thursday after a seven day rally pushed yields lower by nearly 20 basis points.
With light issuance and little secondary trading, yields ended mostly flat.
"Things are quiet and pretty steady across the board," a Boston trader said. "The primary market is virtually non-existent and it's very tough to determine market levels."
A New York trader added: "There is no supply. Treasury weakness will probably halt the rally."
Puerto Rico also took much of traders' attention after the Government Development Bank held a conference call discussing legal opinions in connection with issuance of the sales tax revenue bonds by the Puerto Rico Sales Tax Financing Corp.
External counsel involved in the COFINA series 2011C and senior series 2011D issuance told investors their opinion was that COFINA bonds were not subject to claw-backs by general obligation bond holders. Legal counsel said Act 91 transfers pledged sales tax to COFINA and that pledged tax is not available for use by the commonwealth's Treasury.
"Law 91-2006, which created COFINA, transferred ownership of a portion of the sales and use tax to COFINA and provided that any transferred portion are not 'available resources' under the constitutional provisions relating to full faith and credit general obligation bonds," legal counsel said in a statement. The law provides that the commonwealth agrees not to limit or restrict the rights granted by the COFINA Act or the rights of COFINA to meet its obligations to its bondholders.
Counsel on the call also said COFINA's bond documents require written confirmation of all outstanding ratings and opinions confirming that new revenue would not constitute "available resources" in the event the sales and use tax were to be replaced with another source of revenue.
In addition, the Puerto Rico Secretary of Justice has provided a legal opinion that the sales and use tax allocated to COFINA is not subject to claw-back by GO bondholders under the Puerto Rico constitution.
Counsel on the call also stressed that while no new COFINA issuance has been announced, a transaction would not be completed without again receiving closing opinions from each of bond counsel, underwriters counsel and the Puerto Rico secretary of justice.
Reaction was muted in the bond markets. "The call appears to be a complete waste of time ," a Boston trader said. "Until they agree to change the law or constitution, no one will take them seriously. Bond opinions are just that — opinions — and until it is codified into law, the bond market will not take them seriously."
Other traders agreed. "There is not much reaction," a San Francisco trader said. "I'm not really sure what they can say that will take away the challenge risk."
In similar Puerto Rico news, the governor's proposal for a new regulatory body for the Puerto Rico Electric Power Authority would be a credit negative because it adversely affects PREPA's credit metrics and historical independence to set electricity rates, Moody's Investors Service said Thursday.
The governor pledged to reduce electric rates by 20% in 2015 and create a commission to regulate PREPA. "If the governor's proposed rate reductions proceed without a commensurate reduction in costs, PREPA's debt service coverage ratio would drop to close to 1.00 [times] in 2015 from 1.39 [times] in fiscal year 2012, based on our calculation of the debt service coverage ratio," Moody's said in a statement. " PREPA's debt covenants dictate that rates must be set so that they will be sufficient to pay expenses and meet debt service by at least 1.2 [times]."
The rating agency said the proposals raise questions about whether PREPA will be able to achieve the governor's rate-reduction goals while maintaining its present fiscal condition. The creation of a regulatory commission to oversee PREPA raises questions about its independent rate-setting ability.
In the secondary market, trades compiled by data provider Markit showed mostly firming.
Yields on COFINA 6s of 2042 fell six basis points to 7.18% and Atlantic City, N.J., 4s of 2023 fell two basis points to 3.55%.
Yields on New Jersey's Tobacco Settlement Financing Corp. 5s of 2041 and New York 5.25s of 2022 slid one basis point each to 7.36% and 2.70%, respectively.
Other trades were weaker. Yields on Pennsylvania Turnpike Commission 5.5s of 2041 increased three basis points to 4.99% and Gainesville, Fla., Utility System 5s of 2022 rose one basis point to 2.59%.
On Thursday, yields on the triple-A Municipal Market Data scale ended mostly flat. The two-year and 10-year yields were steady for the third session at 0.34% and 2.44%, respectively. The 30-year finished flat at 4.04% for the second session.
Over the course of the last eight trading session, the 10-year MMD yield dropped 17 basis points from 2.61% on Oct. 21. The 30-year yield slid 19 basis points to 4.23%.
Yields on the Municipal Market Advisors benchmark scale ended mostly steady. The two-year and 10-year yields were flat for the second session at 0.48% and 2.59%, respectively. The 30-year was flat for the fifth session at 4.23%.
Over the past eight trading days, the 10-year MMA yield dropped 17 basis points from 2.76% on Oct. 21. The 30-year yield fell 12 basis points from 4.35%.
Treasuries were mostly weaker. The two-year and benchmark 10-year yield rose one basis point each to 0.32% and 2.54%, respectively. The 30-year yield slid one basis point to 3.63%.