Municipal bond traders trudged along Tuesday afternoon as activity was muted ahead of a Puerto Rico conference call.
The Puerto Rico Government Development Bank will host an investor conference call Tuesday afternoon to discuss the commonwealth's upcoming bond issue, ratings downgrades and financial progress. The call will be a focal point for the market Tuesday, participants agreed.
"A lot of people are taking about Puerto Rico's call," one trader in New York said in an interview. "If they don't get a deal done it'll be a big deal, the market will be done. It's fairly contained at the moment but if they can't get a deal done it's a whole new ballgame."
Puerto Rico announced last week it plans to issue general obligation bonds in the near future. The bonds will be managed by Barclays, Morgan Stanley and RBC Capital Markets. A failure by the island to access capital markets could hurt the rest of the municipal market, some traders said.
"All these guys who have it in their funds, with Puerto Rico coming out of the indexes now, if they can't get a deal done, it starts sliding, some of these guys may start to cut and run," the trader said. "It could be a snowball effect on the market; they could look to sell other things as well."
Others still point to the commonwealth's problems that are specific to the island, saying the impact on municipal bonds as a whole may be tempered.
"There's a lot of recognition that many issues of the commonwealth are specific to the commonwealth," another trader said. "Declining demographics, declining population, those are very specific commonwealth issues that have added import on their financial position."
The fundamental issues the island faces are not systemic to the rest of the market, that trader said.
"The big issue is going to be a function of liquidity with respect to the additional borrowing that's so necessary to calm the markets right now," the trader said.
Market participants will be attuned to whether or not the size of the upcoming deal is announced, as well as the interest rates at which the bonds will price, traders said.
"It's not going to be prevailing market rates for a BBB or BB-type security, in order to entice the level of crossover and hedge fund types that will be necessary to clear the market," the traders said. "It will be higher levels than one would typically anticipate."
Yields according to Municipal Market Data's AAA scale were steady on the short end Tuesday morning, with bonds maturing from 2018 to 2038 falling up to one basis point. Bonds beyond that fell two basis points. The benchmark 30-year Treasury yield was 3.68%, while the 10-year was at 2.71%.
