The Puerto Rico sell-off has led to a "flight to quality," municipal bond traders said, benefiting two deals that came to market Monday: $675 million of New York City Transitional Finance Authority revenue bonds; and $107.3 million of Pflugerville, Texas, Independent School District general obligation bonds.
"The deal actually looks attractive," a trader in New York said, referring to the triple-A New York City TFA deal, which was priced for its first day of retail orders.
"The market kind of weathered a bit of a credit storm with Puerto Rico last week, and with outflows last Thursday, but I have not seen any subsequent selling pressure as a result of those," he said. "Puerto Rico has actually improved over the last two, three days and that adds support to [deals being priced this week]. The New York City TFA spread is wider than it has traditionally come, retail will perform pretty well with it."
Morgan Stanley priced the deal with yields ranging from 0.66% with a 4% coupon in 2017 to par with a 4% coupon in 2039. The 2028 and 2029, 2031 to 2033, and 2035 to 2038 maturities weren't available for retail order.
The bonds will be available for retail order on Tuesday and institutional sale on Wednesday. They have an optional call at par in 2024.
"The New York TFA deal will do extremely well," a trader in Florida said. "Even though a lot of accounts are saturated with it, it's still triple-A and offers a lot of spread over other high-grade names."
The Puerto Rico bonds' sell-off also highlighted the relative attractiveness of the Texas ISD GOs, which are are rated triple-A, because they are backed by the Texas Permanent School Fund.
"You have the Puerto Rico and Detroit situations, so people will orient towards buying higher grade stuff," a trader in Dallas said. "The Pflugerville ISD GOs certainly are qualified because of their triple-A rating."
The Texas PSF is run by the state and is used to guarantee the principal and interest payments of school districts, giving bonds issued by the school districts a triple-A rating. "It's a very secure investment," the trader said.
The bonds carry underlying ratings of Aa2 from Moody's Investors Service and AA from Standard & Poor's.
Citigroup priced the deal with yields ranging from 1.23% with a 5% coupon in 2019 to 3.49% with a 4% coupon in 2033. The deal repriced and was reduced from the originally scheduled $108.3 million. Citi declined to comment on why the deal's total was decreased. The bonds have an optional par call in 2024.
The trader in New York said that the Puerto Rico sell-off was "helpful" to high-grade issues that priced on Monday.
Over the weekend of June 28, Puerto Rico Gov. Alejandro García Padilla signed into law a bill to allow public corporations to restructure their debts. That prompted a series of downgrades of Puerto Rico debt by the three major rating agencies..
Puerto Rico debt sold off so rapidly that it affected the broader muni market, causing yields for benchmark municipal bonds to rise most of last week, according to data provided by Municipal Market Advisors.
Municipal bond funds also reported their first outflows in 10 weeks last week, according to Lipper FMI. Fund flows for all muni bond funds showed outflows of negative $790.3 million for the week ending July 9, following inflows of $193.6 million the week before.
A trader in Florida expects more money to flow out of municipal bond funds, but said market participants are still sitting on a great deal of cash that they will probably deploy toward new issues.
"[Demand for the Pflugerville deal] really has to do with amount of cash investors have to put to work, and they will gravitate towards the higher grade, better known credits," he said. "Texas offers them that, especially with PSF program."
The trader in New York does not see the Puerto Rico sell-off continuing as strongly going into this week, and called the market's initial reaction to the downgrades "knee-jerk."
"At least as far as we know the information that things were going to get worse on the debt might have been a bit overdone, and investors were afraid that redemptions were going to cause some liquidations," he said. "Once the market saw that did not happen, Puerto Rico did better."
The commonwealth's 8s in 2035 GOs from Puerto Rico's mammoth $3.5 billion March issuance were trading at 9.58% on Monday, the lowest yield they have traded at since July 1, according to data provided by Bloomberg.
The most actively traded Puerto Rico Electric and Power Authority CUSIP, the 5s in 2022, traded at 18.4% on Monday, their lowest yield since June 27.
The trader in New York said that Puerto Rico presents some opportunities and predicted investors won't "throw the baby out with the bathwater."
Municipal bond yields opened steady across the curve on Monday, according to Municipal Market Data's triple-A scale.
Yields for the two-year and 10-year held steady at 0.32% and 2.34% respectively, according to Municipal Market Advisor's data. The 30-year's yield rose by one basis point at 3.51%.
Treasuries were mixed Monday, with the 10-year benchmark climbing three basis points to 2.55% and the two-year note inching up one basis point to 0.47%. The 30-year yield fell two basis points to 3.36%.
