Puerto Rico Governor Alejandro García Padilla's proposed balanced budget has not spurred trading on bonds from Puerto Rico's giant $3.5 billion March issuance.
Trading volume for the 8% coupon bonds of 2035 is 80.9% below its 100-day average, according to data provided by Bloomberg.
"It's kind of like well, he's talking that's great, and then do we really give a [expletive]," a trader in New York said. "He has this balanced budget without raising debt, but Puerto Rico already has a lot of debt."
Volume for all of the commonwealth's general obligation bonds is 59.3% below their 100-day average, and Puerto Rico's overall trading volume has dropped 39.6% below its 100-day average.
"It's a shame because Puerto Rico is such an amazing state, but [its economic recovery] is not going well," the trader in New York said. "They've really messed it up, there has been a lot of misappropriation of funds."
The governor's proposed balanced budget for fiscal 2015, announced in a speech Monday afternoon, would be the first balanced budget for Puerto Rico in 20 years, according to a report Janney Capital Markets released Monday. A structural gap of about $1.5 billion will be closed with $800 million in savings achieved by freezing automatic pay increases for government workers as well as $700 million in spending cuts, including school closures and elimination and consolidation of multiple government agencies.
Market participants cite Puerto Rico's dismal economic conditions and the bonds' poor credit quality for not purchasing them.
"Significant fiscal and economic challenges remain," Janney said in its report.
Before the GOs were issued on March 12 the three major credit rating agencies downgraded the bonds to junk. The bonds initially were met with heavy demand, with yields falling 40 basis points on their first day of secondary trading to 8.33%. Yields began to steadily rise during the rest of March and April as preliminary excitement over the largest issuance of 2014 waned.
"Until it's investment grade credit, we are not allowed to buy it, period," a trader in Pennsylvania said. "Puerto Rico does not get the benefit of the doubt anymore."
Yields for the GO fell three basis points to 8.97% on Wednesday, according to data provided by Bloomberg. This is 12 basis points below the 9.09% yields posted Friday, and 40 basis points below the high of 9.37% on April 17.
Janney said in the report the governor might be able to achieve a balanced budget in fiscal 2015.
"It is important to emphasize the immense progress made in the past 18 months," Janney said. "With a budget gap of $2.2 billion in FY 2013, few would have predicted budget balance two year later. The government's positive track record in the current fiscal year reflects well on the likelihood of success in achieving balance in the coming fiscal year."
The California Education Facilities Authority will issue a two-part deal totaling $415 million of revenue bonds Wednesday. Goldman Sachs & Co. will bring $290 million of tax-exempt revenue bonds to market, while Wells Fargo Securities will bring $125 million of revenue bonds. The deal is rated Aaa by Moody's Investors Service.
Raymond James Financial will issue $107.7 million of refunding bonds and tax and waterworks system surplus revenue certificates of obligation for the city of Lubbock, Texas. The deal is received an Aa2 rating from Moody's, and AA-plus by both Standard and Poor's and Fitch Ratings.
In the competitive market, North Carolina will auction $199.1 million of limited obligation refunding bonds Wednesday. The deal is rated AA1 by Moody's, and AA-plus by both S&P and Fitch.
Citigroup Global Markets brought $121.7 million of unlimited tax refunding bonds to the market Wednesday for the North East Independent School District of Texas. Yields ranged from 0.21% with a 2% coupon maturing in 2012 to 3.49% with a 4% coupon in 2033. The bonds are callable at par in 2032 and are rated Aaa/Aa1 by Moody's and AAA/AA-minus by S&P.
Munis were steady Wednesday morning, with yields on bonds maturing from 2015 to 2044.
Treasuries strengthened Wednesday morning, with the 10-year benchmark falling one basis point to 2.69% and the two-year notes slipping two basis points to 0.43%. The 30-year yields were unchanged at 3.50% from Tuesday's market close.
