Market Outlook

In the absence of substantial economic news, the fixed-income markets were focused today on Janet Yellen’s first meeting as Federal Reserve chairperson. Although no major policy announcement was anticipated, there were expectations that the Fed would try to revise its guideposts for future rate action. In fact, the Fed did step away from its previous line in the sand, a 6.5% jobless rate, and adopted instead a hodgepodge of inflation indicators and employment indicators designed to better reflect the true state of the job market. The FOMC also stayed the course in terms of its $10 billion-a-month tapering program.

Following the Fed announcement, 10-year Treasury yields ticked up to around 2.78% and the Treasury curve flattened, an indication that the time frame for rate tightening has been pushed forward.

That said, with the Ukraine situation still in flux, and renewed concerns about a deceleration in the growth of the Chinese economy, the benchmark 10-year Treasury yields should remain stuck in a relatively tight 2.60-2.90% trading range for the time being.

New Issue Market

In the tax-exempt market, after last week’s blowout supply, the new issue calendar has settled down again, barely topping $3 billion this week. This has helped municipals maintain a relatively firm tone in the face of rising Treasury yields.

In another sign that the muni market is finally normalizing from the 2008 crisis, S&P yesterday upgraded bond insurers Assured Guaranty and MBIA’s National Public Finance Guarantee, to AA from AA- and to AA- from A, respectively. For Assured Guaranty, this means that the only insurer to continue operating through the financial crisis will finally shake off its legacy problems and be in a position to fully compete with upstart Build America Mutual (BAM). National Public Finance Guarantee’s higher rating should also pave the way for MBIA’s eventual return to the muni market.

In another sign that the muni market is finally normalizing from the 2008 crisis, S&P yesterday upgraded bond insurers Assured Guaranty and MBIA’s National Public Finance Guarantee …

That’s the good news. Unfortunately, the bad news is that the pie has gotten quite a bit smaller with the steadily shrinking new issue supply, and more competition may not be all that conducive to profitability. From a market structure standpoint, however, a potential rebound of the bond insurers’ market share to around 10-15% should be welcome news to a market starved for liquidity.

Puerto Rico Update

You didn’t really think you could look away from the slow-moving train wreck that is Puerto Rico (PR) for very long, did you? The ink has barely dried on the trade tickets from the March $3.5 billion mega-deal and new credit concerns have already surfaced. Late last week, the president and vice president of PR’s Senate Treasury and Public Finance Committee filed a draft Senate bill aimed at creating a process for restructuring the Commonwealth’s public benefit corporations (PBC).

Needless to say, SB 993, as the new proposed legislation is known, has created a public relations nightmare for the Padilla Team, still basking in the afterglow of the recent “successful” G.O. financing. The GDB and PR’s Treasury Department quickly distanced themselves from it, denying they have any near-term agenda for debt restructuring of any of the PBCs. Of course, bear in mind these are the same folks who just hired restructuring specialist Jim Millstein of Millco Advisors LP as an advisor(!) Although SB 993, as currently drafted, cannot be viewed as a serious legislative initiative, you can hardly blame PR investors for over-reacting to this new element of political risk.

The ink has barely dried on the trade tickets from [Puerto Rico’s] March $3.5 billion mega-deal and new credit concerns have already surfaced.

According to an excellent analysis from a reputable law firm, “the bill introduced in Puerto Rico’s Senate reinforces a risk already faced by Puerto Rico bondholders that Puerto Rico may seek by direct legislation or by legislatively-established process to impair to the extent constitutionally permissible the contractual rights of bondholders of insolvent bonding authorities.” The analysis does point out the significant judicial hurdles such a bill will have to overcome in order to be passed and implemented in a manner consistent with the non-impairment clause of the U.S. Constitution, among other factors. Even if it goes nowhere, SB 993 will serve to highlight the potential complexity of any future debt restructuring process for PR and/or its instrumentalities. (For an even more detailed analysis of the draft bill by local PR attorney John Mudd, click here).

Not surprisingly, prices on PR agencies such as PREPA have given up much of their recent gains in response to the latest news. Of all the public corporations, PREPA is certainly the one most likely to be in the cross-hair of legislators, as energy costs are widely believed to be one of the key factors choking off PR’s economic growth.

This opinion was echoed last week by former Governor Luis Fortuno, speaking in front of the Boston Municipal Analysts Forum. Gov. Fortuno, speaking in surprisingly objective fashion (as if he didn’t have much to do with the current fiscal mess), did call out PREPA as the main culprit for PR’s energy cost problems. (For a complete summary of Gov. Fortuno’s remarks, see our post at

According to Gov. Fortuno, energy costs are critical to PR’s future economic growth: a 10% drop in energy costs may save as much as $1 billion a year. In his view, PREPA is the big problem: in order to promote competition, EPA compliance and conversion to natural gas, the Authority should ultimately get out of the generation business and become purely a transmission system. The potential for privatization of the Authority’s assets through a P3 structure should also be considered. Having said that, Mr. Fortuno doesn’t believe any significant restructuring of PREPA will occur before the 2016 election.

Gov. Fortuno did hold out one ray of hope for the PR economy: along with Hawaii and Alaska, Puerto Rico is pushing for the waiver or repeal of the antiquated Jones Act, which requires that only ships made in the U.S. and flying the country’s flags can deliver goods between U.S. ports. This has had the effect of raising the cost-of-living on the island. Free from Jones Act restrictions, foreign natural gas tankers would be able to dock in Puerto Rico, potentially lowering energy costs.

Now that’s the kind of the relief the people of Puerto Rico would welcome at this time.

Disclaimer: The opinions and statements expressed in this column are solely those of the author and Axios Advisors, who are solely responsible for the accuracy and completeness of this column. This column does not reflect the position or views of RICIC, LLC or MuniNetGuide.

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