Puerto Rico securities accounted for 28 of the top 50 most traded municipal securities in the second quarter of this year due to constant murmurs of political happenings, and will likely remain so through at least the end of this year.
In a report released late last week, the Municipal Securities Rulemaking Board found Puerto Rico bonds tallied over 42,000 trades from April to June, while the market's par amount traded dropped slightly compared to the same time last year.Patrick Luby, senior municipal strategist at CreditSights, said many of the Puerto Rico securities are traded and re-traded without a lot of new CUSIPs filtering in.
“The fact that there is that much trading is indicative that there are market participants with different perspectives on Puerto Rico,” Luby said.
Over the last several years, Puerto Rico issuers have been largely absent from the new issue markets. Since the spring, the island has experienced a lot of market-moving news.
The volume of trading and its activity, Luby said, is a constructive sign for the marketplace as buyers and sellers are both getting in on the action, which are concentrated in a handful of CUSIPs.
“If a market participant is trying to take a position or exit a position in Puerto Rico, there’s a fairly limited universe of available CUSIPs to do that with,” Luby said.
In early April the Puerto Rico Oversight Board filed a motion to claw back payments made to bondholders on Puerto Rico general obligation bonds sold in 2012 and 2014. Around May 20 the board sued to claw back $392 million in Employees Retirement System bond payments.
In mid-June the board said central government bondholders would get 36% to 38% overall recovery, varying depending on bond type and on anticipated court rulings. This would potentially affect $35 billion of bonds.
Gov. Ricardo Rosselló resigned Aug. 2 after becoming embroiled in a scandal over offensive private chat messages that became public. Pedro Pierluisi was sworn in as the new governor on that day. The president of the Puerto Rico Senate and others have since filed court cases challenging the legality of Pierluisi becoming governor without his first having been approved as Secretary of State by the Senate.
In late June the Puerto Rico Treasury projected that General Fund revenues for the fiscal year would come in 33% more than had been originally projected.
The number of Puerto Rico trades was not surprising because of activity in court proceedings over the past few months, which motivated people to trade and some to throw in the towel, said Joseph Krist, partner at Court Street Group Research.
Since bonds are held more institutionally, there tends to be more active and aggressive traders , Krist said.
“There have been so many different opportunities for institutional investors to get in and out of the credit at prices that make sense for them,” Krist said. “They are people who got in really, really cheap and so they may have seen a run and some positive price action.”
Future court proceedings and decisions will cause participants to continue to trade. Krist expects Puerto Rico securities to continue to be at the top of the list of most traded securities until the end of the year.
The total number of trades market wide in the second quarter of 2019 was 2.35 million, a 9.4% decrease from the second quarter of 2018 .
The par amount trades in the municipal securities market totaled $807.6 billion in the second quarter, which was slightly lower than last year’s second quarter, but 6.8% higher than the first quarter of 2019.
The decrease in secondary market trades is areflection of slightly lower issuance, said Michael Decker, a municipal market consultant. Issuance was down by about 7% in the second quarter of 2019, Decker said.
Less issuance could be caused by a strong first quarter, Decker said.
“Some of that is just regular issuance patterns from year to year,” Decker said. “There tends to be variations from year to year. It’s not the big drop we’ve seen in some years where issuance is down 30% quarter over quarter."
Decker noted that Puerto Rico securities are traded often and was not surprised by it being among the most actively traded, saying it has been the trend for a long time.
"Puerto Rico bonds trade very, very actively," Decker said.
The number of variable rate demand obligations rate resets continued to decline in the second quarter to 89,750, down from the 95,624 resets in the second quarter of 2018.
The number of continuing disclosure documents totaled 36,304 in the second quarter with audited and annual financial filings accounting for 20.8% and 19.3%. Bond calls accounted for 24.4%, which has stayed pretty stagnant over the years.
Robert Slavin contributed to this report.
