Responding to the Puerto Rico power authority's positive announcement, trading has held strong for PREPA paper in trading on Friday.
The municipal market let out a collective sigh of relief on Thursday evening after Puerto Rico announced an agreement had been reached between its troubled electric power authority and creditors. Citi and Scotia, the two banks behind PREPA's critical letter of credit, extended the electric authority's LOC to the end of March 2015, giving the public corporation the liquidity and flexibility to straighten out their finances.
In response to the news, pricing for PREPA's debt held steady at 50 cents on the dollar, the highest the paper has been since plummeting to the mid-30s earlier this year. Bids at the 50 cent level came in strong Thursday ahead of the announcement and consummated in trading activity on Friday, traders said.
Traders have abandoned trading the challenged PREPA debt on yield metrics as it has been widely accepted the authority will be restructuring its outstanding debt. The trading price would be a better reflection as to an eventual recovery rate.
A regained confidence in municipals spread to the mainland from Puerto Rico, where yields strengthen significantly in the intermediate and long end of the curve. According to Municipal Market Data's triple-A 5% scale, bonds maturing between 2022 and 2025 were bumped three to five basis points, while bonds maturing between 2026 and 2044 saw bumps between four and six basis points. Bond maturing between 2015 and 2021 were unchanged, according to MMD's scale.
Traders pointed to Puerto Rico's good news and the Treasury market to explain the rally in municipals.
Treasury yields contracted even further on Friday upon news that tensions between Ukraine and Russia has escalated significantly.
The two-year Treasury note was unchanged at 0.42% while the 10- and 30-year each fell seven basis points to 2.33% and 3.13% respectively.
