Prices of Puerto Rico general obligation bonds were trading sharply lower on Monday after a federal judge said the commonwealth's Recovery Act was unconstitutional. Meanwhile, bonds of the Puerto Rico Electric Power Authority (PREPA) were trading higher.
"Following the decision of Federal Judge Francisco Besosa striking down Puerto Rico's Law 71, Debt Recovery Act, March 2 is the next key date when PREPA must present a recovery plan to forbearing bondholders," said Cate Long, Principal of the research firm Puerto Rico Clearinghouse.
"The Forbearance Agreement is scheduled to expire on March 31, 2015 but PREPA has asked creditors for an extension until June to complete the restructuring plan," said Long. "Rate setting for PREPA is now controlled by Puerto Rico's Energy Board, or the governor in an emergency, and it is unclear if PREPA bondholders have any legal recourse to interfere with that process."
A market trader said the news was positive for some bondholders.
"There is a lot of the concern that some of the municipalities can't declare bankruptcy and this kind of news is a good thing," a New Jersey trader said. "It doesn't change the credit issues on the table, but it does give bondholders an opportunity to negotiate in the event of a restructuring, which again is a very positive thing."
According to the MSRB's EMMA website, Puerto Rico GO 8s Series 2014A of 2035 traded 18 times on Monday morning on volume of $31.2 million with a low price of 81 and a high yield of 10.235%.
This was sharply lower than on Friday, when the GOs traded 21 times on volume of $58.6 million with a low price of 83.375 and a high yield of 9.912%.
Meanwhile, PREPA bonds were higher.
The 2010 Series ZZ power revenue 5s of 2018 were trading at a low price of 59 and high yield of 23.098% on volume of $4.615 million.
In contrast, on Wednesday, the last trading day, the bonds were trading at a low price of 50.375 and a high yield of 28.606% on volume of $9.03 million.
"I think we have to wait and see for the next three days or so to see if the market spike will continue," the New Jersey trader said. "If so, it means more institutional investors were coming into the market and if it doesn't, it means it was more of a knee-jerk reaction to the news."
Secondary Market
Meanwhile, prices of top-rated municipal bonds were trading slightly weaker at midday, traders said, with yields on some maturities up by as much as two basis points.
The yield on the muni 10-year benchmark general obligation was up as much as one basis point from 1.95% on Friday, while the yield on 30-year GOs was up as much as two basis points from 2.75%, according to a read of MMD's triple-A scale.
Since the start of the month, the yield on the muni 10-year benchmark general obligation is up by 21 basis points, while yield on the 30-year GO is 25 basis points higher, according to MMD.
Treasury prices were mixed. The two-year note yield was unchanged from 0.64% on Friday, while the 10-year yield decreased to 1.93% from 1.94% and the 30-year yield fell to 2.49% from 2.51%.
On Friday, the 10-year muni to Treasury ratio decreased to 100.6% from 102.8% on Thursday, while the 30-year muni to Treasury ratio slipped to 109.7% from 109.9%.
MSRB Reports Previous Session's Activity
The Municipal Securities Rulemaking Board reported 32,237 trades on Friday on volume of $9.535 billion.
Most active on Friday, based on the number of trades, was the Indiana State Finance Authority's CWA Authority Project 2015 Series A first lien wastewater utility revenue 3/12s of 2034, which traded 103 times with an average price of 100.333 and an average yield of 3.454%.
Primary Market
Muni volume for the upcoming week is estimated at $7.211 billion, according to Ipreo and The Bond Buyer.
Topping the negotiated calendar is the South Carolina Public Service Authority's $1.06 billion of revenue obligations. The deal, for Santee Cooper, is scheduled to be priced by Barclays Capital on Wednesday after a one-day retail order period on Tuesday.
Leading the competitive slate are three separate sales from Washington state totaling about $484 million. All three series will go up for competitive bidding on Tuesday and consist of $133.48 million Series R-2015H general obligation refunding motor vehicle fuel tax bonds; $172.27 million Series R-2015G GO refunding various purpose bonds, and $177.865 million Series R-2015F GO refunding motor vehicle fuel tax bonds. Washington was just in the market last month, when it sold about $1 billion of bonds.
Also on tap are the $300 million Pennsylvania Higher Education Facilities Authority's fixed-rate revenue bonds for the Thomas Jefferson University to be priced by the Bank of America Merrill Lynch on Thursday after a one-day retail order period on Wednesday.
And the Maryland Department of Transportation plans a competitive sale of $280 million consolidated transportation bonds on Wednesday.
