A two-notch downgrade by Moody's on Puerto Rico bonds late Friday sent retail investors fleeing from the commonwealth's debt, now labeled junk by two ratings services.
"Retail is selling, it's nonstop now," said one New York-based trader. "There's no upside to a broker saying not to sell and then it goes up 10 points and then they get fired. Investors in munis are talking about buying money for kid's college, or to retire on, they're looking at something safe for long-term."
Moody's downgrade brought Puerto Rico's general obligation rating two notches to speculative-grade Ba2 from Baa3. The service also cut the commonwealth's Sales Tax Financing (COFINA) senior-lien bonds bonds, considered a safer investment, to Baa1 from A2.
The move by Moody's follows a downgrade by Standard & Poor's on Tuesday that knocked the island's GOs one level to BB-plus from BBB-minus.
"Started to see that rush of bid-wanteds that we thought we would see after the S&P downgrade," one trader in the west coast said in an interview. "As soon as it came out all of sudden there were lists coming from everyone, we saw some pretty big retail shops looking like they're dumping it."
Traders said the timing of the announcement by Moody's, which came close to 2 p.m. in New York, limited the amount of selling that could be done before the market closed.
"It doesn't seem like prices have dropped a ton but we're still watching it," the trader said. "[The timing] didn't give the market too much time to digest it yet. I'm guessing Monday or Tuesday we'll start to see where the market lands."
While retail buyers try to ditch Puerto Rico debt, hedge and muni mutual funds will probably maintain their positions, the New York-based trader said.
"This has gone on for eight to nine months now, any funds involved in Puerto Rico have a high risk tolerance," he said. "The mutual funds and the muni bond guys, nobody's going to try and react there yet. How it's going to change the Puerto Rico's ability to move around going forward, that will be interesting."
Puerto Rico commonwealth bonds with a 6% coupon maturing in 2038 were traded at a yield of 9.11% in the secondary Friday, according to data from Markit. Insured commonwealth bonds with a 5.5% coupon maturing in 2020 traded at 6.10%.
Prior to the downgrade, municipal bond traders said Friday activity was particularly low as a bleak new issuance calendar this month has failed to inspire investors.
With just $3.53 billion in volume this past week, there hasn't been much to trade. Potential volume in the coming week is estimated to be even lower with $2.65 billion scheduled.
"As we look forward it's going to be extremely quiet and there's a holiday week after that, so the expectation is it will be steady as it goes until we get some direction either way," the trader said.
Yields on some muni bonds dipped Friday morning as most remained steady, even as the U.S. Labor Department reported weak employment gains.
"We've had a very muted reaction to the jobs number," the trader said. "Treasuries are a little bit better as the jobs report is showing some weakness. We don't have a strong growth story out there and without that, rates on bonds are likely to remain where they are."
Yields on bonds maturing in 2015, 2018 and from 2038 to 2044 were down as much as one basis point, according to Municipal Market Data's AAA scale. Other bonds were steady.
Treasuries were mixed Friday, with the 30-year yield gaining one basis point to 3.68%, while the 10-year slid two basis points to 2.69%. The two-year yield fell by three basis points to 0.31%.
