It would be wrong to underestimate the value and impact of the recent upheaval in the municipal bond market caused by the declining fortunes of the Commonwealth of Puerto Rico. I wanted, therefore, to address some of the issues in this edition of MUNI NATION. I believe the July 8, 2014 commentary from Municipal Market Advisors (MMA) is a good synopsis of the current environment. With their permission, I’ve included it below:

“It would have been hard to imagine that the news out of Puerto Rico would have zero effect on the general market this month. That the Treasury market has been constructive and, in general, municipal rates have only weakened modestly, speaks to the positive technical backdrop currently in place (modest supply estimates over the next two weeks, large reinvest up to now, still mildly positive flow figures and the broader rate environment). . . . Still, Puerto Rico is having an impact:

As for the round-lot Puerto Rico [institutional]activity: several of the larger mutual fund complexes are seeing outflows and in varying cases selling. . . . It is important to point out that demand from taxable high-yield buyers exists and is likely stabilizing the current prices (after last week’s adjustment).

As for odd-lot Puerto Rico [retail]activity: we understand that several retail brokerage networks have been inundated with sellers. It is unclear though if a consistent buyer for these offerings has emerged as anecdotally we understand the bids that have arrived have been cheap enough to push retail to hold for the time being. If they continue to go unfilled it should continue to widen the gap between the trade sizes and prices on the varying Puerto Rico credits.”

I see Puerto Rico’s debt restructuring legislation signed into law two weeks ago, combined with another wave of downgrades by Moody’s, as reference points for the current market. I believe it is an inescapable truth that taxable buyers of Puerto Rico debt seem to be providing some important liquidity for this market.

Source: Barclays as of July 9, 2014.

The Barclays Puerto Rico Municipal Bond Index covers tax-exempt debt issued by the Commonwealth of Puerto Rico with a nominal maturity of one or more years.