Prices of top-shelf municipal bonds continued to strengthen on Thursday, traders said, as yields on some maturities closed down by as much as eight basis points. Muni yields have fallen by about 13 basis points in the two trading sessions since the Federal Open Market Committee meeting concluded.
The rally bypassed Puerto Rico debt, as Moody's Investors Service said a proposal by the island's legislators urging a referendum to allow a restructuring of the commonwealth's $70 billion of debt is a credit negative.
Secondary Market
The yield on the 10-year benchmark muni general obligation closed down six basis points to 1.97% from 2.03% on Wednesday, while the yield on 30-year GO declined by eight basis points to 2.77% from 2.85%, according to the final read of Municipal Market Data's triple-A scale.
On Monday, the yield on the 10-year stood at 2.12% and the yield on the 30-year was at 2.93%.
The Federal Open Market Committee's Wednesday statement on monetary policy dropped the word "patient," hinting that an interest rate hike could come as early as June. However, the Fed Chair Janet Yellen indicated it is still in no rush to raise rates -- and is actually being rather patient while awaiting more economic data to paint a clearer picture on the health of the US economy.
"Bonds traded with some confidence that the FOMC message could sound dovish, even if the word to describe raising rates, 'patient' was removed," MMD Senior Analys Randy Smolik wrote in a market comment. "Little wonder bonds surged on the FOMC message and subsequent comments from Yellen."
Treasury prices finished mixed on Thursday. The yield on the two-year Treasury note rose to 0.62% from 0.56% on Wednesday, while the 10-year yield was unchanged at 1.97% and the 30-year yield rose to 2.55% from 2.54%.
The 10-year muni to Treasury ratio was calculated at 99.8% on Thursday versus 106.0% on Wednesday, while the 30-year muni to Treasury ratio stood at 109.2% compared to 113.7%.
Moody's: Public Talk of Debt Restructuring Is Credit Negative
Three members of the Puerto Rico House of Representatives have proposed legislation that may open the door to a restructuring the commonwealth's more than $70 billion of debt. In a press release Sunday, the representatives called for a referendum on a constitutional amendment allowing for the restructuring of the debt of the commonwealth and its public corporations.
"The credit-negative discussions, regardless of whether they culminate in enacted legislation, signal the rising likelihood of a consolidated debt restructuring that affects not only public corporations, but also the central government's general obligation and other tax-backed securities," Moody's Investors Service says in a credit comment on Thursday.
The rating agency warned that as the general election approaches, proposals like this may gain a broader following in the Caa1-rated commonwealth.
"The legislature's latest effort again underscores that political forces will encourage the government to put a higher priority on allocating funds to public services rather than debt service, making bondholders shoulder part of the fiscal burden," Moody's said.
Legislative actions aimed at weakening Puerto Rico's legal obligations to existing investors have coincided with rising yields on Puerto Rico's outstanding bonds.
"The yield spread between Puerto Rico's 2035 general obligation bonds and comparable triple-A rated tax-exempt debt widened to 620 basis points in early July, after passage of the public corporation debt restructuring law, from 450 basis points three months earlier," Moody's said. "The spread was 661 basis points as of March 16."
Moody's concluded that the current talk puts at risk "Puerto Rico's ability to issue about $2 billion of petroleum products tax-backed debt that the government is relying on to replenish liquidity in coming weeks."
Analysts at Markit said that yields on commonwealth bonds appear to be rising.
"Specifically with regard to the Puerto Rico GOs of 2035, we saw some block size trades last Friday in the 85 price range, with yields around 9.68%," a Markit analyst said, adding that "on Wednesday, we saw the same bond trade around 83.6 with a yield of 9.88%."
Primary Market
The primary market was quiet on Thursday, with trading desks working through the bulk of new supply that priced over the past few days.
In one of the last remaining sizable deals of the week, Bank of America Merrill Lynch priced the Lower Colorado River Authority, Texas' $125.27 million of Series 2015 A and B refunding revenue bonds.
The $25.785 million Series A bonds were priced as 5s to yield 1.86% in 2021 and 2.19% in 2022 and from 3.02% with a 3% coupon in 2027 to 3.84% with a 3.75% coupon in 2037. The 2015 maturity was offered as a sealed bid. The Series A bonds are rated Aa2 by Moody's Investors Service and A by both Standard and Poor's and Fitch Ratings, except for the 2027 through 2034 and 2035 through 2037 maturities, which are insured by Assured Guaranty Corp. and rated A2 by Moody's and AA by S&P.
The $99.49 million Series B bonds were priced to yield from 1.63% with a 4% coupon in 2020 to a split maturity in 2031 which was priced as 3 1/2s to yield 3.57% and as 5s to yield 3.21%. The 2015 maturity was offered as a sealed bid. The Series B bonds are rated A2 by Moody's and A by both S&P and Fitch, with the exception of the $3.905 million portion of the 2029 split maturity, the $4.535 million part of the 2030 split maturity and the $5.190 million portion of the 2031 split maturity, which are insured by Assured and rated A2 by Moody's and AA by S&P.
Tax-Exempt Money Market Funds Post Outflow
Tax-exempt money market funds had an outflow of $443.7 million, bringing total net assets to $259.99 billion, in the period ended March 16, according to The Money Fund Report, a service of iMoneyNet.com. This followed an inflow of $1.09 billion to $260.43 billion in the previous week.
The average, seven-day simple yield for the 396 weekly reporting tax-exempt funds remained at 0.01% for a 98th straight week.
The total net assets of the 991 weekly reporting taxable money funds fell $19.06 billion to $2.428 trillion in the period ended March 17, after experiencing an inflow of $10.64 billion to $2.447 trillion in the prior week.
The average, seven-day simple yield for the taxable money funds remained at 0.02% for the ninth consecutive week.
Overall, the combined total net assets of the 1,387 weekly reporting money funds decreased $19.50 billion to $2.688 trillion in the period ended March 10, which followed an inflow of $11.73 billion to $2.708 trillion in the prior period.
