Municipal bonds were sluggish Wednesday afternoon even as technical indications showed opportunity in the market. Traders speculated what the impact of a Puerto Rico downgrade would have on prices.
"We're constructive to neutral and we're having a tough time," a Florida-based trader said in an interview. "Despite the thin new issue, and even with positive mutual fund inflows recently, we're just not seeing the two-way flow that would lead to significant price advances."
The trader said some dealers find the market more conducive to swap trades as activity in the primary market remains slow.
Weekly volume in the municipal market is consistent with average volumes so far this year, with issuance expected to come in at just under $5 billion, according to Thomson Reuters.
Investors have yet to try selling Puerto Rico bonds, apart from a few odd-lots, traders said.
"As far as Puerto Rico's concerned, I think it's been well telegraphed and the funds that are long are still assessing what the reaction may be," the trader said. "Most of the reaction might be with individual investors but we haven't seen anyone testing the secondary market."
The bonds were trading on pace with levels seen in recent weeks, market participants said, lending credibility to the argument by some that a downgrade to junk had been long-anticipated by the municipal market.
"The levels are near or at yields of trades in recent weeks," Alan Schankel, managing director at Janney Capital Markets, said in an email. "I have seen some smaller pieces of non COFINA at higher yields but nothing unusual."
Standard & Poor's downgraded Puerto Rico's general obligation bonds to speculative, or junk, grade, cutting the rating to BB-plus from the investment grade of Baa1. The rating remains on watch negative S&P said in its announcement Tuesday.
"We believe the downgrade to below investment grade has been long anticipated, so a downgrade is theoretically 'priced-in,'" Shawn O'Leary and Molly Shellhorn of Nuveen Asset Management, LLC said in a report. "However, we expect to see additional selling of Puerto Rican bonds and related dollar price declines."
Puerto Rico commonwealth general obligation bonds with a 5% coupon maturing in 2041 were trading at an average yield of 8.27% Wednesday morning.
"Average levels today are not inconsistent with recent weeks," Schankel said. "Of course things may change as the day progresses."
Yields on all municipal bonds were slightly firmer Wednesday morning, with bonds maturing from 2020 to 2032 down one basis point, according to Municipal Market Data.
"While the downgrade of Puerto Rico's general obligation credit rating to junk by Standard & Poor's yesterday afternoon shouldn't have surprised anyone, what was perhaps surprising to some was the muted market reaction to the rating agency's action," Mark Palmer, an analyst at BTIG, said in a report Wednesday.
Shares on publicly traded insurers Assured Guaranty and MBIA did not show a reaction to the downgrade, Palmer said, despite having an aggregated exposure to Puerto Rico bonds of over $10 billion.
In the negotiated market, Barclays held institutional pricing for $308 million of University of Massachusetts Building Authority revenue bonds. The bonds were issued in two series, $293.9 million tax-exempt and $14.1 million taxable.
Yields on the tax-exempt bonds ranged from 0.32% with a 3% coupon maturing in 2015 to 4.28% with a 5% coupon maturing in 2044. The bonds, rated Aa2 by Moody's, AA-minus by Standard & Poor's and AA by Fitch, are callable at par in 2024.
Also in the negotiated market, RBC Capital Markets held pricing for $171.4 million of Fort Worth, Texas, water and sewer system revenue refunding and improvement bonds.
Yields on the bonds ranged from 0.175% with a 2% coupon maturing in 2015 to 3.79% with a 5% coupon in 2034. The bonds, rated Aa1 by Moody's and AA by Fitch, are callable at par in 2024.
Treasury yields rose Wednesday, as the 10-year benchmark yield climbed four basis points to 2.67%, while the 30-year moved five basis points to 3.65%. The two-year yield remained at 0.32%.
