Bids on Puerto Rico's Electric Power Authority rose Thursday as rumors circulated regarding the public corporation's letter of credit.
Bids for PREPA paper got as high as 50 cents on the dollar on Thursday, the highest since prices on the electric authority's debt fell into the 30s in June, according to traders and trade runs given to The Bond Buyer. Since that time the market has abandoned tracking the credit's yield and focused solely on price, the best indicator as to what the recovery rate post-restructuring might be, traders said.
One New York based trader said the strong bids might be surrounding a potential takeover of the public entity's LOCs, currently held by Citi and Scotiabank. Major Canadian bank RBC has been rumored to potentially be taking over the LOC, according to the trader. "RBC does not have nor is currently contemplating a credit position with respect to PREPA," though it has a position in the island's Highway and Transportation Authority, according to an RBC spokesperson.
The strong bids would point to the market's comfort that the situation had been resolved, at least for the time being, the trader said.
However, the transfer didn't make sense to some market participants. No counsel representing RBC has been present during restructuring discussions for PREPA, according to a person close to the situation, who declined to be identifies.
"If they have, they've been very very quiet about it," the person continued. "I just can't believe it's true."
Taking over the LOC, could be good business, according to a Midwest trader who said the bank that did so could charge any rate it wanted, thanks to PREPAs lack of alternatives.
Both LOCs, from Citi for $146 million and Scotia's $525 million letter, were set to expire Thursday afternoon after being extended 14 days from the original expiration date on Aug. 1. Trading on PREPA's paper spiked on Aug. 5, which indicated that some market players had been privy to confidential information surrounding the bank negotiations, as previously reported. At that time, prices rose as high 48.875.
The Midwest trader suggested that the rise in price could be as simple as the market responding to a recent UBS report that speculated on PREPA's price appreciation since its plunge in early summer. The bank's report claimed haircuts and impairments for the inevitable PREPA restructuring may not be as dramatic as initially anticipated, said the Midwest trader.
RATES UP AS TENSIONS ESCALATE
Outside of Puerto Rico, the muni market mirrored the Treasury rally. The market strengthened, most dramatically in the long end of the curve. According to Municipal Market Data's triple-A 5% scale, bonds maturing up to 2017 were unchanged, while ones maturing between 2018 and 2025 fell two basis points. Bond maturing between 2026 and 2037 fell three basis point and those maturing between 2038 and 2044 dropped four basis points.
"It's not surprising, given what's going on in the Treasury market," said a Midwest based trader, explaining Treasuries have enjoyed a significant rally since international tensions worsened in mid-July. "The U.S. market is really lagging what's going on in Europe."
Since market close on Wednesday, Treasuries strengthened across the yield curve, most notably on the long end. The two-year note fell one basis point to 0.42%, the 10-year fell three basis points to 2.409%, and the 30-year dropped four basis points to 3.209%.
While those spreads have consistently tightened over the past four weeks, traders agreed there's still a long way for U.S. Treasuries to drop.
"There's money flowing out of Europe so there's no reason German or even French sovereign debt should trader tighter than ours," the Midwest trader said.
Currently, the 10-year German Bund trades 138 basis points tighter at 1.02% than its U.S. comparative, according to data provided by Bloomberg. The 10-year French OAT traded 100 basis points lower than the U.S. 10-year at 1.40%, according to Bloomberg.
Traders expect European and U.S. sovereign debt yields to flip as threats of war in Eastern Europe escalate. With those Treasury yield drops, municipals are expected to follow, picking up spillover from investors engaging in a "flight to safety" strategy, a New Jersey based trader said.
"Add in QE unwinding, we'll be seeing a lot of money flowing in from Europe come fall," the Midwest based trader said, referring to the Federal Reserve's quantitative easing program.
Municipal Market Advisor's triple-A 5% also showed significant strengthening the muni market on Thursday. The two-year note fell two points in yield to 0.30%, the 10-year fell two basis point to 2.13% and the 30-year fell three basis points to 3.30%.
MODEST OUTFLOWS FOR MUNI MONEY FUNDS
Tax-exempt money market funds scaled back outflows to $310 million as total net assets decreased to $258.21 billion in the week ended Aug. 11, according to The Money Fund Report, a service of iMoneyNet.com.
The outflows paled in comparison to the $2.68 billion that exited the funds last week as total net assets settled at $258.52 billion.
The average, seven-day simple yield for the 418 weekly reporting money market funds remained at 0.01%, while the average maturity increased by one day to 35 days.
Taxable money market funds, meanwhile, grew by $10.50 billion to $2.342 trillion, up from $1.59 billion in losses last week.
The average seven-day simple yield for the 1,010 weekly reporting was unchanged at 0.01%, while the average maturity was unchanged at 43 days.
The combined total net assets of the 1,428 took in $10 billion and settled at $2.60 trillion in the week ended Aug. 12, which was up from the $1.09 billion that arrived last week.
