CORRECTED-UPDATE 2-New Puerto Rico debt in high demand after robust offering

Thu Mar 13, 2014 10:45am EDT

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(Corrects name of company in paragraph 12)

By Edward Krudy

NEW YORK, March 12 (Reuters) - Puerto Rico's newly issued bonds rallied on Wednesday, a day after investors flocked to the high returns offered by the cash-strapped U.S. territory's $3.5 billion debt sale.

Analysts said the debt, much of which was bought by more risk-tolerant hedge funds, was drawing strong interest from investors who missed out on Tuesday's heavily oversubscribed sale, as well as buyers hoping to make a quick profit from the rally.

There were also indications that despite the unusually large denominations of $100,000, some of the trading was meeting demand from retail investors.

Puerto Rico's newly issued general obligation debt traded with an average yield of 8.35 percent, with over $557 million, or more than 15 percent of the issue, changing hands in brisk trade, according to data compiled by Municipal Market Data.

"The bonds have traded up in a very significant way over the last 18 to 24 hours," said James Colby, chief municipal strategist at Van Eck Global in New York. "It's been a while since I've seen a market environment that supported such a strong after market for trading."

Van Eck took part in Puerto's Rico debt sale for the firms index tracking funds but was not involved in trading on Wednesday, said Colby.

The strong appetite for Puerto Rico's sale, which was nearly five times oversubscribed with $16 billion in offers, was seen as a positive for the overall municipal bond market. Last year, Detroit's bankruptcy filing and concerns Puerto Rico was locked out of markets were among factors that weighed on investors.

Prices on longer-dated triple-A rated bonds jumped on Wednesday. Thirty year bonds gained 6 basis points.

Tuesday's sale, considered crucial for financial reforms in the U.S. territory, which has $70 billion of outstanding debt, was priced in a single 2035 maturity with an 8 percent coupon and an approximate yield of 8.727 percent.

Wednesday's trading was unusual in the muni market, where only about 1 percent of outstanding bonds can trade in the secondary market on any given day. It may reflect the greater presence of the non-traditional investors who bought Puerto Rico's debt.

The debt sale was one of the biggest and most anticipated in years in the usually sleepy $3.7 trillion municipal bond market that is predominantly held by mom and pop investors.

"Some of it is probably going to retail now where they are buying it out of institutions," said Lyle Fitterer, a municipal fund manager at Wells Capital Management, pointing to some smaller trades at higher prices on Wednesday.

Fitterer said he did not take part in Tuesday's sale and was not active in the secondary market.

Many muni funds shied away from the deal after Puerto Rico's debt was downgraded to junk status by the three major ratings agencies earlier this year. Some investors have not ruled out the possibility Puerto Rico might restructure its debt despite the mammoth sale this week. (Reporting by Edward Krudy; Editing by James Dalgleish and Andrew Hay)

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