Puerto Rico bonds issued this month have set record-low prices, signaling that a rally in the commonwealth’s debt may falter after a regulator said it’s looking at transactions in the new securities.
The U.S. territory sold $3.5 billion of general obligations on March 11, the municipal market’s biggest-ever junk deal, and most of the original buyers were hedge funds. The bonds traded as low as about 91.6 cents on the dollar yesterday, the cheapest since the initial pricing at 93 cents.
The Financial Industry Regulatory Authority said March 21 that it’s examining trading in Puerto Rico’s new bonds. While offering documents stipulated a $100,000 floor for purchases, scores of transactions below that amount have still been completed, data compiled by Bloomberg show.
“It’s another negative headline for an issuer that has had its fill of negative headlines,” said Gary Pollack, who oversees $6 billion of munis as managing director in Deutsche Bank AG’s private-wealth unit in New York.
The $100,000 threshold also applies to trading after the securities price, said two people with knowledge of the sale who requested anonymity without authorization to speak publicly.
The average yield on the tax-free debt was 8.76 percent yesterday, equivalent to a 14.5 percent taxable rate for earners in the top federal bracket. The bonds priced on March 11 at about 8.73 percent.
Puerto Rico has been leading a rally this year in the $3.7 trillion municipal market, gaining 7.6 percent through March 21, compared with 3.2 percent for all state and local debt, S&P Dow Jones Indices data show.
The securities pared their advance last week, falling 0.5 percent on March 21, more than five times as much as any other state.
The commonwealth’s borrowing, which came the month after it was cut to speculative grade by the three biggest rating companies, gave officials enough cash to pay bills through June 2015 as they try to revive a shrinking economy.
The breathing room initially sparked a rally in the new Puerto Rico bonds, with the debt reaching as high as 99 cents on the dollar on March 12.