Municipal bond yields remained steady to firmer Wednesday as an after-market downgrade of Puerto Rico bonds led traders to speculate on the impact of the inevitable.
"Our market gets rocked by the unexpected," said one trader in North Carolina. "We knew it was coming and probably long overdue. Most of the fund managers have been prepared."
Standard & Poor's downgraded Puerto Rico's general obligation bonds to speculative, or junk, grade, cutting the rating to BB-plus from the investment grade of Baa1. The rating remains on watch negative S&P said.
"The biggest question mark is what is it going to do to funds - do they have to liquidate? Usually that's the case if you go below a certain grade," the trader said. "I'm just speculating, but it's possible some funds altered the charter to accommodate for Puerto Rico bonds."
Since a December 2012 downgrade, Gov. Alejandro García Padilla has taken a number of steps pleasing to bond analysts, including installing a budget with a reduced deficit.
Further attention brought to the plight of Puerto Rico and its poorly rated bonds could provide a boost to higher-rated credits, the trader said.
Yields on municipal bonds were steady to somewhat firmer Wednesday. Yields on municipal bonds maturing from 2021 to 2038 lost one basis point, according to Municipal Market Data's 5% coupon read.
Municipal Market Advisors reported a single basis point-drop on some bonds maturing from 2019 to 2025, as well as those in 2040 and 2041 on the long end.
Municipal bonds may get fresh attention if equity markets continue a slump that began this month, traders said.
"We definitely seeing a little better activity than yesterday but I think people are having to assess the equity market, see how far we've run, and put a pencil to when they're going to get involved in munis," the North Carolina-based trader said.
The Standard & Poor's 500 Index has fallen 4.1% in the past month and the Dow Jones Industrial Average has slipped 6.2%. Struggling equities could spell good news for munis, traders said, even as the S&P and Dow Jones regained some losses Tuesday.
"If stocks keep crashing it may start to sway investors' minds that got out of munis before," pne trader in Chicago said. "Municipals don't look so bad if equities keep falling."
The municipal bond market was sluggish Tuesday as traders awaited the week's big issues.
"There's not much to say about the market today," the trader said. "We haven't quite caught up to treasuries yet."
The municipal market will have a decent amount of new money to work with this week, with issuance hovering around $5 billion, according to Thomson Reuters.
The biggest deal, $1 billion of Illinois general obligation bonds led by Citi, is set to price on Thursday. The deal is part of the state's $31 billion capital program known as Illinois Jobs Now.
Wells Fargo securities priced $160.1 million of University of Illinois Auxiliary Facilities System revenue bonds Wednesday.
Rated Aa3 by Moody's and AA-minus by Standard & Poor's, the bonds were offered with yields ranging from 3.28% with a 5% coupon in 2024 to 4.64% with a 5% coupon in 2044. The bonds are callable at par in 2024.
The negotiated market also featured $733.5 million of Goldman, Sachs & Co.-led Texas Grand Parkway Transportation Corporation toll revenue refunding bond anticipation notes.
The notes were sold with a yield of 0.65% and a 3% coupon maturing in 2016. No optional call was provided.
Barclays Capital Inc. was expected to hold a retail order period Tuesday for $315 million of University of Massachusetts Building Authority revenue bonds, and RBC Capital Markets was scheduled to bring $172.1 million of Fort Worth, Texas, water and sewer revenue bonds.
Some traders said that after a month of rallying, new issues were pricing a little below attractive yield levels.
Deals are "coming a little bit too rich in my opinion," one trader said. "Getting my hands on bonds I can own is difficult. So I participate more in the secondary market in that situation."
Secondary trades compiled by data provider Markit showed strengthening.
Indiana Finance Authority Midwestern Disaster Relief revenue bonds with a 5% coupon in 2039 slid one basis point to 5.41%, and Clark County, Nevada, local improvement refunding bonds with a 5% coupon maturing in 2022 slid three basis points to 4.63%.
New Jersey Turnpike Authority revenue bonds with a 5% coupon maturing in 2022 fell two basis points to 2.75%, while Buckeye Ohio Tobacco Settlement Financing Authority bonds with a 5.875% coupon maturing in 2030 gained one basis point to 8.07%.
Treasury yields rose Tuesday, as the 10-year benchmark yield climbed five basis points to 2.63%, while the 30-year moved to 3.60%. The two-year yield edged up two basis points to 0.32%.
"It is not unusual for munis to lag Treasuries in either direction when yields move quickly," Janney Capital Markets said in a daily report Tuesday. "We expect munis to operate in catch-up mode today, outperforming Treasuries."
The municipal market will have a decent amount of new money to work with this week, with issuance hovering around $5 billion, according to Thomson Reuters.
