Puerto Rico munis plunge on Trump's debt forgiveness remarks

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Puerto Rico bonds took a big hit on Wednesday after President Donald Trump suggested the commonwealth’s debt needed to be “wiped out” to help the island recover from the devastation caused by Hurricane Maria.

“We are going to work something out. We have to look at their whole debt structure,” Trump told Fox News late Tuesday. “You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be — you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave good-bye to that.”

Prices decreased for Puerto Rico bonds in active trading.

“Early Wednesday, prices for Puerto Rico’s general obligation 2035 maturity 8% coupon bond declined more than 10 points on multiple round lot trades observed,” according to the bond pricing service IHS Markit. “This is a 19% decline from [the] previous day's close.”

Markit said the bonds had been moving up and down quite a bit in morning trade, with some the GOs last trading at about 36.

The Puerto Rico Commonwealth benchmark Series 2014A general obligation 8s of 2035 were trading at a low price of 30.25 cents on the dollar on Wednesday compared to a low price of 44 cents on the dollar on Tuesday, according to the Municipal Securities Rulemaking Board’s EMMA website.

Activity was heavy with $113.68 million of bonds trading hands in 60 trades compared to $3.6 million in seven trades on Tuesday.
On Wednesday morning, White House Budget Director Mick Mulvaney walked back the president’s remarks, saying Trump’s suggestion should not be taken literally.

"I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem," Mulvaney said. "We are not going to bail them out. We are not going to pay off those debts. We are not going to bail out those bondholders."

Randy Smolik, MMD’s said, it’s "hard to believe the U.S. government would recommend Puerto Rico bond holders will be left penniless," but the possibility of a "haircut was now being discounted by the market.”

Among other trades on Wednesday, the Commonwealth Series 2012A public improvement refunding 5s of 2035 were trading at a low price of 100.208 cents on the dollar in 20 trades totaling $1.14 million compared to a low price of 102.336 in 10 trades totaling $360,000 on Tuesday, according to EMMA.

The Commonwealth Series 2012A public improvement refunding 5s of 2035 were trading at a low price of 100.208 cents on the dollar in 20 trades totaling $1.14 million compared to a low price of 102.336 in 10 trades totaling $360,000 on Tuesday, according to EMMA.

The Aqueduct and Sewer Authority Series 2008A senior lien revenue 5s of 2028 were trading at a low price of 99 cents on the dollar in nine trades totaling $455,000 compared to a low price of 99.22 in 13 trades totaling $295,000 on Tuesday, according to EMMA.

Secondary market
Top-quality municipal bonds were trading stronger at mid-session. The yield on the 10-year benchmark muni general obligation fell as much as one basis point from 2.01% on Tuesday, while the 30-year GO yield dropped as much as two basis points from 2.82%, according the a read of Municipal Market Data's triple-A scale.

U.S. Treasuries turned weaker on Wednesday. The yield on the two-year Treasury rose to 1.48% from 1.47%, the 10-year Treasury yield gained to 2.34% from 2.33% and the yield on the 30-year Treasury bond increased to 2.89% from 2.87%.

On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 86.3% compared with 85.9% on Monday, while the 30-year muni-to-Treasury ratio stood at 98.2% versus 99.0%, according to MMD.

MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 43,744 trades on Tuesday on volume of $11.38 billion.

MMD yields trend upward
Yields on top-rated municipal securities have been trending upward over the past week, according to a read of MMD’s 10-year muni GO.

On Tuesday, the 10-year yield ended at 2.01%. This compared to a reading of 1.92% on Sept. 25 which jumped to 1.98% on Sept. 27 and broke the 2% barrier the next day.

Geo-political worries such as in North Korea and Spain along with the natural disasters in Puerto Rico and the Virgin Islands combined to keep munis in demand over the past week.
Primary market
The primary took a breather a day after the Dormitory Authority of the State of New York sold about $1.7 billion of bonds and a day before the authority returns to the market to sell another $300 million-plus.

RBC Capital Markets is set to price the authority’s $301.48 million of school districts and financing program revenue bonds in five series on Thursday.

The Series 2017 F, G, H, I and J bonds carry various ratings ranging from Aa2 and Aa3 from Moody’s to A-plus from S&P and AA-minus from Fitch.

On Wednesday, Keybank Capital Markets is expected to price Cuyahoga County, Ohio’s $140.8 million of sales tax revenue bonds for the Quicken Loans Arena project.

The deal is comprised of $35 million of Series 2017A tax-exempts, $35.27 million of Series 2017B taxables and $70.53 million of Series 2017C taxables.

The deal is rated Aa2 by Moody’s Investors Service and AAA by S&P Global Ratings.

Bond Buyer reports 30-day visible supply
The Bond Buyer's 30-day visible supply calendar decreased $2.17 billion to $6.98 billion on Wednesday. The total is comprised of $2.20 billion of competitive sales and $4.78 billion of negotiated deals.

NYS comptroller releases Q4 bond sale calendar
A tentative schedule for planned bond sales from New York State, New York City, and their major public authorities during the fourth quarter, was released on Tuesday by state comptroller Thomas DiNapoli.

The planned sales total $8.02 billion and include $6.09 billion of new money and $1.93 billion of refundings or reofferings as follows:

  • $5.54 billion scheduled for October, of which $3.68 billion is new money and $1.86 billion is refundings or reofferings;
  • $930 million scheduled for November, of which $860 million is new money and $70 million is refundings or reofferings; and
  • $1.55 billion scheduled for December, all of which is new money.

The anticipated fourth quarter sales compare to sales of $8.58 billion in the third quarter and $7.57 billion during the fourth quarter of 2016.

The prospective fourth quarterly calendar includes anticipated bond sales by the following issuers: DASNY, Long Island Power Authority, Metropolitan Transportation Authority, New York City Housing Development Corp., New York City Municipal Water Finance Authority, New York City Transitional Finance Authority, New York State Energy and Research Development Authority, New York State Environmental Facilities Corp., New York State Housing Finance Agency, State of New York Mortgage Agency, Triborough Bridge and Tunnel Authority and the Utility Debt Securitization Authority.

Continued muni outperformance seen
Limited supply and persistent demand may lead to continued outperformance in the municipal bond market in the near term, according to Bill Merz, senior research analyst at U.S. Bank Wealth Management.

“While longer-term municipal debt is attractive versus corporate bonds, munis are quite expensive for shorter maturities,” he wrote in a Tuesday market comment.

The steep municipal curve may offer taxable investors attractive incremental compensation for extending duration, he said.

“We encourage a focus on higher-quality credits since structural problems in Puerto Rico and Illinois persist and may trigger periodic, renewed scrutiny of other weak credits,” Merz wrote. “We encourage using an active approach to manage risks from individual credits.”

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Primary bond market Secondary bond market New York State Dormitory Authority Cuyahoga County State of New York City of New York, NY New York City Housing Development Corporation Triborough Bridge and Tunnel Authority, NY Long Island Power Authority New York City Transitional Finance Authority State of New York Mortgage Agency Commonwealth of Puerto Rico Puerto Rico Aqueduct & Sewer Authority Puerto Rico Sales Tax Financing Corp (COFINA) New York State Environmental Facilities Corporation Metropolitan Transportation Authority