Prices of Puerto Rico general obligation bonds traded lower on Monday after a federal judge last week ruled that the commonwealth's Recovery Act was unconstitutional. Meanwhile, bonds of the Puerto Rico Electric Power Authority (PREPA) were trading higher.
On Friday, Judge Francisco Besosa ruled the Puerto Rico Public Corporation Debt Enforcement and Recovery Act "is preempted by the federal Bankruptcy Code and is therefore void pursuant to the Supremacy Clause of the United States Constitution."
On Monday, Puerto Rico's government said it would file an appeal to the decision in the Court of Appeals for the First Circuit in Boston.
"March 2 is the next key date when PREPA must present a recovery plan to forbearing bondholders," said Cate Long, Principal of the research firm Puerto Rico Clearinghouse. "The Forbearance Agreement is scheduled to expire on March 31, but PREPA has asked creditors for an extension until June to complete the restructuring plan."
A market trader said the news was positive for some bondholders as there had been growing concern about the bankruptcy process.
"It doesn't change the credit issues on the table," a New Jersey trader said, "but it does give bondholders an opportunity to negotiate in the event of a restructuring, which again is a very positive thing."
According to the MSRB's EMMA website, Puerto Rico GO 8s Series 2014A of 2035 traded 81 times on Monday on volume of $41.45 million with a low price of 81, a high yield of 10.235%. This was lower than on Friday, when the GOs traded 21 times on volume of $58.6 million with a low price of 83.375, a high yield of 9.912%.
Meanwhile, PREPA bond prices were higher.
The PREPA 2010 Series ZZ power revenue 5s of 2018 traded one time on Monday at a low price of 59, a high yield of 23.098%, on volume of $4.615 million. In contrast, the bonds were trading at a low price of 50.375, a high yield of 28.884%, on volume of $9.03 million on Wednesday, the last previous day they traded, according to EMMA.
The PREPA 2008 Series WW power revenue bond 5s of 2028 traded one time on Monday at a low price of 49.85, a high yield of 12.999% on volume of $10,000. In contrast, the bonds traded three times at a low price of 46.77, a high yield of 13.837% on volume of $30,000 on Friday.
"I think we have to wait for the next three days or so to see if the market spike will continue," the New Jersey trader said. "If so, it means more institutional investors are coming into the market and if it doesn't, it means it is more of a knee-jerk reaction to the news."
Secondary Market
Meanwhile, prices of top-rated municipal bonds closed slightly weaker, traders said, with yields on some maturities up by as much as two basis points.
The yield on the muni 10-year benchmark general obligation rose one basis point to 1.96% from 1.95% on Friday, while the yield on 30-year GOs was up two basis points to 2.77% from 2.75%, according to the final read of MMD's triple-A scale.
Since the start of the month, the yield on the muni 10-year benchmark general obligation is up by 22 basis points, while yield on the 30-year GO is 27 basis points higher, according to MMD.
Treasury prices were unchanged on Monday. The two-year note yield was unchanged from 0.64% on Friday, while the 10-year yield remained at 1.94% and the 30-year yield was flat at 2.51%.
The 10-year muni to Treasury ratio was calculated at 100.9% from 100.6% on Friday, while the 30-year muni to Treasury ratio stood at 110.1% compared to 109.7% on Friday.
Tax-Exempt Bond Funds Report More Inflows
Municipal bond funds which report weekly posted $589.132 million of inflows in the week ended Feb. 4, after seeing inflows of $892.528 million in the week ended Jan. 28, according to the latest Lipper data.
"The fund flows are pretty strong as retail investors tend to chase returns," said Phil Fischer, municipal research strategist at Bank of America Merrill Lynch. "There was a little downturn on Friday, but they still remain positive. All of last year it was solid as we saw inflows and as long as that's the case, people respond to that by increasing their investments and we don't see that changing anytime soon. We are positive on the muni market and we take the position that fund flows will remain solid especially for the longer end of the curve," he said.
Muni bond funds have experienced inflows in each week of 2015, according to Lipper data.
Alan Schankel, managing director, Janney Capital Markets also believes that the trend of positive fund flows will continue at least for the foreseeable future.
"What could change the trend of positive fund flows would be an unexpected credit event, such as a city has a problem or a multi notch downgrade of a city or large issuer or even an interest rate event but I don't see that happening anytime soon," said Schankel. "I do think there is an outlying probability in the next several months of an event like that happening but not anytime soon. Retail investors are still going for the tax exemption and it is extremely valuable to some folks," he said.
Long-term muni bond funds saw inflows of $373.103 million in the latest week, after inflows of $549.093 million in the previous week, according to Lipper.
In contrast, long-term municipal bond mutual funds saw $1.297 billion of inflows in the week ended Jan. 28, according to the Investment Company Institute. ICI reported that inflows into long-term funds were $1.045 billion in the week ended Jan. 21, $968 million in the week ended Jan. 14, and $1.326 billion in the week ended Jan. 7.
Primary Market
Muni volume for the week is estimated at $7.211 billion with the South Carolina Public Service Authority's $1.06 billion of revenue obligations topping the new issue slate. The deal, for Santee Cooper, is scheduled to be priced by Barclays Capital on Wednesday after a one-day retail order period on Tuesday.
Leading the competitive slate are three separate sales from Washington state totaling about $393 million. All three series will go up for competitive bidding on Tuesday.
MSRB Reports Previous Session's Activity
The Municipal Securities Rulemaking Board reported 32,237 trades on Friday on volume of $9.535 billion. Most active on Friday, based on the number of trades, was the Indiana State Finance Authority's CWA Authority Project 2015 Series A first lien wastewater utility revenue 3/12s of 2034, which traded 103 times with an average price of 100.333 and an average yield of 3.454%.
