Puerto Rico 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."
Traders agreed, saying Puerto Rico bonds maintained trading at levels established in preceding weeks.
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 negative watch 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.
Treasury yields rose Wednesday, as the 10-year benchmark yield climbed three basis points to 2.66%, while the 30-year moved four basis points to 3.64%. The two-year yield remained at 0.32%.
