Puerto Rico Bonds Rally Most in Five Months After Decline on Law

Bonds from Puerto Rico are rallying the most since February as investors bet prices fell too far after the three biggest rating companies cut the island’s credit deeper into junk this month.

Puerto Rico securities rose 0.8 percent yesterday, the biggest one-day increase since Feb. 20, according to S&P Dow Jones Indices. It was the fifth straight session of gains. The rally follows a 10-day stretch of declines that intensified when Puerto Rico Governor Alejandro Garcia Padilla proposed and signed legislation that would let certain public corporations restructure debt.

The Caribbean commonwealth and its agencies have $73 billion of bonds that are tax-free nationwide. Almost two-thirds of muni mutual funds own the securities, making it a focal point for the $3.7 trillion local-debt market. Distressed debt buyers and hedge funds have stepped in to buy the island’s securities, some of which are worth less than half of their value from a year ago.

“Prices are up -- there have been up trades in all Puerto Rico,” said Adam Buchanan, vice president of sales and trading at Ziegler in Chicago. “You’re seeing crossover buyers coming in and taking risk. Information is filtering through to buyers and people are picking their spots.”

Ratings Rumble

Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have lowered their grades on all forms of Puerto Rico securities since Garcia Padilla signed the restructuring measure June 28. The companies cited a change in the commonwealth’s willingness to repay bondholders. The downgrades threaten market access, which may cut off the lifeblood of the commonwealth’s finances.

The last time Puerto Rico issued new debt was in March, when it priced $3.5 billion of general obligations maturing in July 2035. The securities fell to a record low price of 83.5 cents on the dollar this month, data compiled by Bloomberg show. They rose as high as 90 cents today, approaching the original price of 93 cents.

Garcia Padilla has said the general obligations are “absolutely safe.” Investors have said the Puerto Rico Electric Power Authority, with $8.6 billion of obligations, is most likely to use the new restructuring provisions.

Investment funds of Franklin Templeton Investments and Oppenheimer Funds Inc. filed a suit June 28 claiming the law is unconstitutional. A federal court gave Puerto Rico 21 days to respond.

The broad market is also rallying, resuming its strongest start to a year since 2009. Last week, individuals yanked the most money from muni mutual funds since January, according to Lipper US Fund Flows data.

The yield on benchmark 10-year munis fell 0.06 percentage point to 2.36 percent, the lowest since June 9, Bloomberg data show.

Before it's here, it's on the Bloomberg Terminal.