Yields on the general obligation bonds that were part of Puerto Rico's giant $3.5 billion issuance in March are falling as the market prepares for Governor Alejandro Garcia Padilla's speech Tuesday evening.
"In the run-up to this evening's expected budget proposal from PR's governor, pricing of the 8% of the 2035 maturity from the March new general obligation issue (Ba2/BB-plus/BB), have been gradually improving," Janney Capital Markets said in a report released on Tuesday.
Yields on the bonds have fallen by four basis points to 9.08% since Friday, dropping one basis point from 9.09% on Monday, according to data provided by Bloomberg.
Investors have been wary of the bonds since they were issued March 12 because of the poor credit rating. Before the bonds were issued the three major credit rating agencies downgraded Puerto Rico GOs to junk on concerns about the notoriously debt-ridden commonwealth's ability to pay back investors.
The day after the bonds were issued, yields fell 40 basis points to 8.33% in secondary trading. After a couple days of trading yields began steadily rising again reaching a high of 9.37% on April 17, according to Janney.
Investors said the yield hike was caused by the Puerto Rico Supreme Court's April 11 declared unconstitutional certain parts of the commonwealth's teachers' pension reform plan, reform the governor had said was critical to Puerto Rico's economic recovery.
"Negative news came from the Puerto Rico Supreme Court, which struck down recently enacted reforms to the Teachers' Retirement System (TRS)," Bank of America Merrill Lynch said in a report released on Monday. "The reforms would have increased minimum retirement age and contribution requirements for retirees and instituted a defined contribution plan instead of a defined benefit plan for new members. The ruling is a setback to the administration's efforts to address the significant toll pension costs that have contributed to the commonwealth's structural budget deficit."
While yields have fallen since April 17, concern over Puerto Rico's fiscal future after the reform was struck down has kept yields above 9.1% until Monday, according to data provided by Bloomberg.
"The governor is expected to propose the first balanced budget in more than a decade, with projected balance to be achieved through both spending cuts and revenue increases," Janney said in the report.
A trader in New York predicts the speech will have an effect on the 8% 2035 GOs.
"The big conference call for Puerto Rico will set the tone for that part of the market," he said. "There will be some wait and see on that, it won't affect the rest of the muni market, but it will impact the pretty liquid Puerto Rico part of the market."
A trader in Chicago does not see the governor's speech improving Puerto Rico's credit anytime in the near future.
"Anything that anyone says about Puerto Rico is delaying the enviable," he said. "It's a [lousy] situation and not getting better, anything the governor says will delay [solving] the real problems."
Trading volume for the 8% 2035 GOs is 56.2% below its 100-day average, according to data provided by Bloomberg. The commonwealth's overall trading volume is 10.8% below its 100-day average, and it is currently the 12th most actively traded U.S. state or territory.
"The Commonwealth of Puerto Rico 8% 2035s retained its position as the most actively traded CUSIP, although activity has slowed," Barclays said in a report released on Friday. "Yields on the bonds ended the week at 9.17%, rallying 26bp w/w. With yields still above the at-issue level, we continue to see value in the bonds. The Puerto Rico Sales Tax Financing Corp (COFINA) 2054 zeroes were also active, with yields up 1bp w/w to 6.76%."
Morgan Stanley & Co. will bring $439.5 million of hospital revenue refunding bonds to the market for the city of Royal Oak, Mich.'s Finance Authority, the largest deal of the day in the negotiated market. The deal received an A1 rating from Moody's Investor Services and A from Standard and Poor's.
In the competitive market, Pennsylvania is expected to bring $834.5 million of GO bonds to the market on Tuesday, the largest deal of the week. The deal is rated AA by Fitch Ratings.
Municipal bond yields continued to rise on Tuesday increasing up to two basis points for four-to 30-year maturities, according to Municipal Market Data's Triple-A Scale. Yields for bonds maturing in three years or less held steady.
Treasuries weakened Tuesday morning, with the 30-yields climbing three basis points to 3.47% and the 10-year benchmark rising two basis points to 2.69%. The two-year notes were unchanged at 0.45% from Monday's market close.
