The municipal market is fairly quiet coming off of the holiday weekend with light trading activity.
"There's really not much of a reaction today in the muni space," a New York trader said. "Treasuries aren't doing all that much. People are just shaking off the cobwebs from the holiday weekend."
Munis mostly strengthened Monday, with the yields on bonds maturing in 12 to 29 years falling much as one basis point, according to the Municipal Market Data's triple-A scale. Yields on bonds maturing in one to 11 years were steady.
Treasuries were mixed Monday, with the 30-year yields slipping four basis points to 3.44% and the 10-year benchmark sliding three basis points to 2.62%. The two-year note rose two basis points to 0.53%.
Though market participants anticipated a spike in Illinois trading on Monday, investors who hold Illinois credits have still not reacted to the state's Supreme Court's ruling that retiree health care subsidies are protected by the state's constitution.
Trading on all Illinois bonds is 76.1% below its 100-day average, according to data provided by Bloomberg, lower than Thursday when it was 48% below average.
Trading on the state general obligation bonds is 47.9% below its 100-day average, and trading is 90.6% below its 100-day average for city of Chicago bonds.
The Puerto Rico sell-off may inject volatility into the market this week, market participants said.
"Market participants should be aware of potential headline-driven broad market volatility from Puerto Rico's challenges in the coming weeks," John Dillon, chief municipal bond strategist and managing director at Morgan Stanley, wrote in a report released on Thursday.
The weekend of June 28, Puerto Rico enacted a law that allows the island's public corporations to restructure debt.
Moody's Investors Service downgraded the commonwealth's outstanding $14.4 billion GO debt to B2 from Ba2 on July 1, because of the new law. Moody's also downgraded a slew of Puerto Rico agencies and public corporations, dropping the commonwealth's Sales-Tax Financing Corp.'s senior and subordinate lien bonds to Ba3 and B1, respectively.
The Puerto Rico Electric Power Authority was downgraded to Caa2 from Ba3, and many other Puerto Rico agencies were also lowered.
Yields on Puerto Rico GOs, COFINA, and PREPA bonds rose after the downgraded, and the yields for bonds from the commonwealth's $3.5 billion March issuance jumped to their highest level ever.
"I would venture to stay an arm's length away from Puerto Rico debt until the issues clear up," a trader in New York said. "We won't know its impact on the market until fund flows come out this week."
Dillon wrote in the report that if there is broader market volatility from Puerto Rico issues, in the absence of rising U.S. Treasury yields, such volatility may be an opportunity for investors to add exposure to non-Puerto Rico municipals.
"However, headline-driven muni risk and UST-driven interest rate risk may facilitate a longer lasting span of price erosion that would need to be monitored for appropriate entry points," he wrote. "Our base case remains one of rising interest rates (eventually). Our target maturity range is 4 to 9 yrs; we prefer above-market coupon securities."
Volume is scheduled to pick up this week, but is still lower than June's levels. Volume is expected total $3.5 billion, compared to $2.8 billion the week before.
"The market is looking for new credits, so new structures will do well," a trader in Chicago said.
Barclays Capital will bring $250 million of Connecticut Health and Educational Facilities Authority revenue bonds on Wednesday. The deal is rated Aaa by Moody's Investors Service and AAA by Standard & Poor's.
Citigroup Global Markets will price $250 million of Indiana Finance Authority private activity bonds. The deal is rated BBB-minus by S&P and BBB by Fitch Ratings.
Morgan Stanley will issue $238 million of Louisiana gasoline and fuel tax revenue refunding bonds on Thursday. The deal is rated Aa1 by Moody's and AA by Standard & Poor's.
In the competitive market, the Massachusetts School Building Authority will auction $300 million of bond anticipation notes on Thursday. The deal is rated MIG1 by Moody's, SP-1-plus by S&P and F1-plus by Fitch.
The state of Wisconsin will sell $254.8 million of general obligation bonds on Wednesday.
The Florida Department of Transportation will auction $240 million of turnpike revenue bonds.
