Cheapening Puerto Rico bonds are again drawing the attention of hedge funds looking for high-yield investments.
The territory's bonds, which have been the focus of many market observers since the island's commonwealth general obligations were downgraded to junk this month, cheapened to new levels this week, according to Standard & Poor's Dow Jones Indices.
The weighted average yield of bonds in SPDJI's Municipal Bond Puerto Rico Index reached an all-time high of 7.52%, the company said in a note Friday. The index tracks both GOs and revenue bonds.
"Uncertainty continues to grow as all three ratings agencies have downgraded Puerto Rico bonds to below investment grade this month as it prepares to bring a $3.5 billion bond issue to market," J. R. Rieger, vice president of fixed-income indices at SPDJI, said in the report.
As yields rise, market participants have noticed renewed interest by hedge funds seeking big payouts if the bonds don't go bust.
"We're seeing inquiries from hedge funds trying to buy it at screaming cheap levels," a trader in New York said in an interview. "They're trying to buy it at really cheap levels, like back in September or October, when things really started to hit the fan. You could buy it at 11% or 12% yields, and they're looking to see if we get to those levels."
Hedge fund managers are most interested in the general obligation bonds, according to the trader.
"Most of the time it's about looking at the GOs," he said. "I don't think they know too much about the other bonds. They're a little bit novice, they just hear about the yield and want in."
Traders said that hedge funds show more interest as negative news about Puerto Rico hits the headlines.
"I think there's been tremendous hedge-fund interest and cross-over interest in Puerto Rico in the past six months," another New York-based trader said. "With the downgrades and additional headlines certainly there are additional opportunistic investors that are coming to the forefront."
Though yields in the 7% to 8% range may not suffice, the funds are looking at higher-yield paper, like some GOs which currently trade as high as 10%.
"It's hard to generalize what rate of return is required by each individual hedge fund, as everyone is going to have a different yield, but certainly higher yields are superior to lower levels," the trader said.
Municipal bond yields overall were unchanged Friday as traders were absent ahead of a holiday weekend and lack of new supply kept trading at a minimum. Issuance in the coming week is projected to fall below $3 billion to just $2.28 billion, according to data from Ipreo and The Bond Buyer.
