Puerto Rico $3.5 Billion Deal Takes Up 33% of First-Day Trading

Bonds from Puerto Rico’s record $3.5 billion general-obligation sale accounted for one-third of the trading volume of the entire $3.7 trillion municipal market on the day of their issue.

Underwriters led by Barclays Plc priced the tax-free bonds on March 11 to yield 8.73 percent, or 93 cents on the dollar. It was the biggest junk-rated deal in the municipal market’s history. Hedge funds were the majority of buyers, with traditional muni investors also participating, said David Chafey, chairman of the Government Development Bank, which handles the commonwealth’s debt sales.

Investors started trading the bonds that afternoon, with $5.1 billion of the debt changing hands, or 33 percent of volume that day, according to the Municipal Securities Rulemaking Board, a self-regulatory organization that monitors the local-debt market. On previous Tuesdays since December, no issuer has accounted for more than 6.6 percent of trading, data compiled by Bloomberg show.

The bonds have gained as much as 7.5 percent since their initial pricing, trading as high as $1 on a $25,000 transaction on March 12, MSRB trading data show. The bonds changed hands yesterday at an average yield of 8.43 percent, or 95.76 cents on the dollar, Bloomberg data show.

“There’s no question that a number of institutions were looking at this as perhaps a somewhat quick flip,” said Dan Heckman, a senior fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which oversees $115 billion. “The minute they had a decent allotment, they flipped the position to someone else at a higher price.”

Activity Ranks

The debt traded in about 940 transactions March 11, the fifth-most for a muni bond in a single day since the start of 2013, according to the MSRB.

Puerto Rico had its credit rating cut to junk last month as its leaders struggle to revive a shrinking economy. Proceeds of the bond sale give the U.S. territory enough cash to pay bills through June 2015.

About 70 percent of U.S. muni mutual funds hold commonwealth securities, which are tax-exempt nationwide, according to Morningstar Inc.

Exchange-traded funds that focus on lower-rated munis purchased the debt.

Market Vectors High Yield Municipal Index ETF (HYD), the largest high-yield muni ETF, and SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB) both bought, Bloomberg data show.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Jeffrey Taylor

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