Yields on Puerto Rico's mammoth $3.5 billion general obligation bonds, issued in March, jumped to their highest levels.
Yields on the 8% bonds of 2035 rose by 20 basis points to 9.69% on Wednesday morning, according to data provided by Bloomberg.
Richard Larkin, senior vice president and director of credit analysis, at HJ Sims wrote in a report that it is "foolish and naïve for someone to think that Puerto Rico bonds will lose all their value."
"There is still fundamental value for Puerto Rico bonds because of the government's ability to tax and its authorities' legal monopoly over its service areas for water, sewer and electric facilities," Larkin wrote.
Yields on the bonds are rising, according to market participants, because Moody's Investors Service
Yields on COFINA 5.25s of 2040 — the bond that accounts for the most COFINA trading volume after a zero coupon bond — rose by 23 basis points to 7.15% on Wednesday morning.
The Puerto Rico Electric Power Authority was downgraded to Caa2 from Ba3, and many other Puerto Rico agencies were also lowered.
Yields on the PREPA 5.25s of 2040, which makes up most of the Authority's trading volume, increased by 55 basis points to 13.52% on Wednesday morning.
Moody's said it downgraded the Puerto Rico debt because the commonwealth passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, a law that allows the commonwealth's public corporations to defer or reduce payments on outstanding bonds.
"Puerto Rico's new law marks the end of the commonwealth's long history of taking actions needed to support its debt," Moody's wrote in a press release. "It signals a depleted capacity for revenue increases and austerity measures, and a new preference for shifting fiscal pressures to creditors, which, in our view, has implications for all of Puerto Rico's debt, including that of the central government."
"Even if this law reduces bond payment obligations through negotiation or legal mandate, it is very possible that a bondholder would do better under a 'bankruptcy' type settlement than to sell bonds at today's fire-sale prices," Larkin wrote in the report.
There has been some positive news coming out of the commonwealth, too, recently. On Tuesday Puerto Rico adopted a $9.56 billion budget, which Puerto Rico Gov. Alejandro García Padilla signed hours before the Moody's downgrades. Also, PREPA was able to make a $418 million coupon payment to bondholders, which was in doubt.
Municipal bond yields rose for intermediate and long maturities, according to Municipal Market Data's triple-A scale. Yields for bonds maturing in six years increased by as much as one basis point, jumped by as much as two basis points for seven- to eight-year maturities, and from one to three basis points for bonds maturing from nine to 30 years .
An investor in the northwest said the sell-off was prompted by the ADP employment report released on Wednesday morning. The report showed a 281,000 increase in private payrolls for June, up from 179,000 the previous month. Analysts had predicted a 213,000 rise.
