Trading on bonds from Puerto Rico's giant $3.5 billion March issuance spiked Wednesday after Gov. Alejandro García Padilla's Tuesday speech when he proposed balanced budget for the commonwealth.
The volumes for the 8% coupon bonds of 2035 jumped to 97.6% over their 100-day average after trading at 80.9% below the average on Wednesday morning, according to data provided by Bloomberg. Market participants are still skeptical over whether any of these proposed changes will actually be enacted.
"Ultimately we do not know whether the proposal will fix the problems in the end," a trader in New York said. "And the commonwealth has big problems."
Trading volume for all of the commonwealth's GOs has risen to 15.5% above its 100-day average, and has increased to 58.6% higher than the average for overall Puerto Rico bonds.
"It's kind of like well, he's talking, that's great, and then do we really give a [expletive]," the New York trader said. "He has this balanced budget without raising debt, but Puerto Rico already has a lot of debt."
The governor's proposed balanced budget for fiscal 2015, announced in a speech Tuesday evening, would be the first such budget for Puerto Rico in 20 years, according to a report Janney Capital Markets. A structural gap of around $1.5 billion will be closed with $800 million in savings achieved by freezing automatic pay increases for government workers as well as $700 million in spending cuts, including school closures and elimination and consolidation of multiple government agencies.
Market participants cite Puerto Rico's dismal economic conditions and the bonds' poor credit quality for not purchasing them.
"Significant fiscal and economic challenges remain," Janney said in its report.
Before the GOs were issued on March 12 the three major credit rating agencies downgraded the bonds to junk levels. The bonds initially were met with heavy demand, with yields falling 40 basis points on their first day of secondary trading to 8.33%. Yields began to steadily rise during the rest of March and April as preliminary excitement over the largest issuance of 2014 waned.
"Until it's investment-grade credit, we are not allowed to buy it, period," a trader in Pennsylvania said. "Puerto Rico does not get the benefit of the doubt anymore."
Yields for the GO fell 17 basis points to 8.83% on Wednesday, according to data provided by Bloomberg. That's 26 basis points below the 9.09% yields posted Friday, and 40 basis points below the high of 9.37% on April 17.
The two California deals that were issued on Wednesday also added liquidity to the current low-volume market.
The California Health Facilities Financing Authority issued $100 million of revenue bonds for the Lucile Salter Packard Children's Hospital at Stanford with yields ranging from 2.88% for the 5% coupon in 2025 to 4% for the 5% coupon in 2043.
"The bonds are long-fives sold by Stanford, so they are one of the more liquid bonds available, so they should have been very well-subscribed," Matt Fabian, managing director a Municipal Market Advisors, said in an interview. "This is a market without the kind of liquidity we're typically used to — investors have to find liquidity where they can. Stanford is a source of liquidity for the future."
The bonds were brought to market by Morgan Stanley and are rated Aa3 by Moody's Investors' Service, AA-minus by Standard & Poor's and AA by Fitch Ratings. There is an optional par call in 2024. "The Stanford deal got bumped two-and-a-half basis points," Fabian said.
The California Education Facilities Authority also issued a two-part deal totaling $415 million of revenue bonds where yields reached up to 3.625% with a 5% coupon in 2045 for the $279 million revenue bond part of the sale. They were brought to market by Goldman, Sachs & Co.; there is a make whole call option at MMD minus 25 basis points.
Yields on $125 million of revenue bonds issued by Wells Fargo Securities were at 1.75% with a 5% coupon in 2021. There is a make-whole call option. The deal is rated Aaa by Moody's and AAA by S&P and Fitch.
"I think investors are maybe looking at a longer-term low-rate environment; that may be one of the considerations why investments like muni bonds with higher yields are attractive," J.R. Rieger, vice president of fixed income indices at S&P Indices, said in an interview.
Raymond James Financial priced a two-part deal totaling $108.2 million for Lubbock, Texas. Yields on $45.1 million of refunding bonds ranged from 0.15% with a 2% coupon in 2014 to 2.82% with a 5% coupon in 2026.
In the competitive market, JPMorgan won the bid for $199.1 million of limited obligation refunding for bonds Wednesday North Carolina. Yields ranged from 0.74% with a 5% coupon in 2017 to 2.76% with a 5% coupon in 2026. There is no call option. The deal is rated AA1 by Moody's, and AA-plus by both S&P and Fitch.
Yields on bonds maturing beyond 2028 strengthened by one basis point, according to the Municipal Market Data triple-A scale.
Yields for 30-year bonds fell by one basis point to 3.65%, according to data provided by MMA.
Yields for the 2-year and 10-year maturities held steady at 0.38% and 2.33% respectively.
