(In Feb. 26 story, corrects spelling of S&P Dow Jones Indices
executive's name to Rieger instead of Riegler, paragraphs 4 and
By Lisa Lambert
WASHINGTON Feb 26 The $3.7 trillion U.S.
municipal bond market has been stunned by what would have been
unthinkable a few months ago: Puerto Rico debt is rallying.
Credit spreads on the troubled territory's bonds are
shrinking. Yields on its general obligation bonds in the
secondary market are falling. And all this is happening against
the backdrop of events that should make the bonds radioactive to
buyers. Most notably, the three rating agencies cut Puerto
Rico's credit score to junk earlier this month.
But crossover buyers such as hedge funds are seeing
opportunity and other investors are lured by the bonds' rich
yields, which could bode well for Puerto Rico's sale of $2.8
billion of refunding and new-money debt next month.
"For the last several days, there's been a bounce for Puerto
Rico GOs," said J.R. Rieger, vice president of fixed-income
indices at S&P Dow Jones Indices. "It's counterintuitive because
you've got that multibillion-dollar deal in March, and with that
heavy supply, you'd expect the yields to rise."
Still, the taxable equivalent of the bonds' yields, which
are tax-exempt nationally and in each state, is around 11
percent right now, he said.
"The yield is getting attractive relative to the risk," he
Tax-exempt investment-grade debt had returned 2.55 percent
year to date on the S&P National AMT-Free Municipal Bond Index
as of Friday. Yields on the S&P Municipal Bond Puerto Rico
General Obligation Index, meanwhile, were 7.53 percent last
week, for a year-to-date return of more than 10 percent.
"It's really been an incredible rally, which tells you the
market is potentially going to give them access," said Daniel
Berger, Municipal Market Data analyst. "There's an appetite for
RECESSION AND YIELDS
Puerto Rico's economy is in a nearly unbroken eight-year
recession, and last year, concerns about its financial state
reached a fever pitch. The island has outstanding debt of about
$70 billion. Its major population and revenue declines are
raising questions about how it will pay off such a steep bill.
On Dec. 27, Puerto Rico bond yields hit 8.95 percent, the
highest level on Municipal Market Data's benchmark scale on
records going back to 1997.
Yields stayed above 8 percent until Feb. 19, the day after
the government laid out its coming financing package, when they
dipped to 7.94 percent. In less than a week, yields fell 18
basis points to end on Tuesday at 7.76 percent, according to
MMD, a unit of Thomson Reuters.
The difference between Puerto Rico's yields and top-shelf
municipal bonds - its credit spread - tells a similar story.
Puerto Rico's 30-year general obligation bonds traded at 485
basis points higher than top-rated bonds on Jan. 29, according
to MMD. That was its widest spread for 2014.
As of Feb. 25, they traded 395 basis points above comparable
top-shelf debt, an 18.6 percent drop.
Recently, investors around the world have moved into riskier
securities at the same time that upheaval in the stock market
had pushed buyers back into fixed-income securities, said
Domenic Vonella, also an analyst at MMD.
"It was just so far out in left field with similarly rated
bonds that it was very attractive," he said about Puerto Rico.
"Greece debt was nowhere close."
Puerto Rico's pressures remain, though, and analysts are
focused on whether Puerto Rico can pull off next month's deal,
and what yields those bonds will fetch, Rieger said.
"We should all put our seatbelts on and watch what happens
here," he said.
(Editing by Jan Paschal)