Strategists are telling investors to start investing in low-credit Puerto Rico bonds again, if they have tolerance for some risk.
In recent reports strategists said credit concerns about Puerto Rico bonds were overblown and that the bonds' high yield makes them an attractive investment.
"We believe [there is] a buying opportunity in Puerto Rico Agency debt, as we believe the market has overreacted to legislation," Barclays said in a report released on Friday.
Puerto Rico's trading volume has fallen recently, largely because investors were anxious about credit risk. On Friday, Puerto Rico bonds' trading volume fell to 71.4% below its 100-day average, according to data provided by Bloomberg. Puerto Rico's trading volume was 66.9% below its 100-day average on Tuesday.
"The 'iceberg' analogy is appropriate," Richard Larkin, senior vice president and director of credit analysis at Herbert J. Sims wrote in a report released after the initial issuance. "In late October, a hedge fund manager not worth naming proclaimed on the air that Puerto Rico bonds weren't worth more than 10 cents on the dollar. While I considered the remark as ridiculous, we all know, 90% of icebergs are hidden underwater. In this case, Puerto Rico's ability to borrow funds in the public credit markets was a huge iceberg."
Barclays said that concern about the bonds credit is even more overstated when weighed against their high yield's benefits.
"The basic premise is that Puerto Rico bonds with low dollar prices represent value as restructuring risk is overestimated in these prices," Barclays said. "We believe there is no imminent restructuring risk; the combination of low dollar prices and significant carry create compelling risk/reward opportunities for investors who can tolerate the high volatility likely in these bonds."
The yield on the commonwealth GO with an 8% coupon in 2035 was 8.706% on Tuesday.
Barclays is also telling investors to look at the Puerto Rico Electric Power Authority bonds, which had a 10.704% yield on its 5.75% coupon in 2036.
There are no deals over $100 million scheduled for issuance in the negotiated or competitive market on Tuesday.
On Wednesday, $120 million Lincoln Public School District, Neb., general obligation bonds will be auctioned in the competitive market.
Muni yields are mixed Tuesday morning, with bonds maturing from 2017 to 2020 falling as much as one basis point, and yields on bonds maturing beyond 2023 climbing as much as two basis points. Bonds maturing in 2021 to 2022 as well as yields in the short-term held steady, according to the Municipal Market Data scale.
Treasury yields were mixed Tuesday morning, as the 30-year jumped four basis points to 3.60% and the 10-year benchmark climbed three basis points to 2.76%. Two-year notes were unchanged at 0.44%.
