Puerto Rico debt is rallying the most in a month, outpacing the $3.7 trillion municipal market, as the U.S. commonwealth’s revenue beats forecasts.
General obligations maturing in July 2041 traded today with an average yield of 8.54 percent, or 4.65 percentage points above benchmark munis, the narrowest difference since Dec. 10, data compiled by Bloomberg show.
The island’s securities are graded one step above junk by the three major rating companies, with a negative outlook, as officials struggle to turn around a shrinking economy. The territory plans to sell bonds before March. Moody’s Investors Service last month threatened to cut the island to speculative grade within 90 days.
Its obligations, which are tax-exempt nationwide, are benefiting from gains across the municipal market as outflows from mutual funds abate, said Daniel Solender, who helps manage $15 billion of local debt at Lord Abbett & Co. in Jersey City, New Jersey.
“The lower-quality range of the market is doing much better,” Solender said. “Demand is coming back.”
Puerto Rico debt has earned 2.3 percent this year, outperforming the 27 states tracked by Standard & Poor’s and the 1.3 percent gain for the broader market. Yields on benchmark 30-year munis fell to 3.96 percent at 2 p.m. in New York, the lowest since June, Bloomberg data show.
Preliminary revenue collections for the six months through December were $80 million above budgeted estimates, according to Treasury Secretary Melba Acosta.
About 70 percent of U.S. local-debt mutual funds held commonwealth securities as of Jan. 9, according to Morningstar Inc. Puerto Rico and its agencies have $70 billion of debt, of which $14 billion is owned by the funds, according to Morningstar.
Investors last week added about $50 million to U.S. muni mutual funds that focus on high-yield debt, the first addition since October, Lipper US Fund Flows data show.
Puerto Rico officials plan to sell long-term securities this month or in February, after they said rising interest rates last quarter blocked issuance of as much as $1.2 billion of sales-tax debt.
Officials have kept spending below budgeted projections. For July through November, expenses were $135 million below appropriations, according to Carlos Rivas, director of the Office of Management and Budget.
“That definitely helps,” Solender said. “Getting their revenue to increase to meet their budget target and the fact that they are on pace to do that is definitely a positive. The big overhang is still that they have to bring a deal to the market.”
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