Puerto Rico successfully issued 3.5 billion in debt on March 11, 2014. Even after increasing the size of the deal from 3 billion to 3.5 billion, the prices quickly traded up from the original 93 dollar price to 97. All in all, from the beginning of the year, yields on existing PR GO debt fell from close to 9.00% to 7.25% after the successful placement of the new deal. Yields have recently backed up to 7.75%. Why.....?

1) Technicals - Part of the new deal was allocated to accounts that wanted to trade the bonds quickly (flippers). As the bonds traded up they sold into the higher bid leaving the dealers long. In addition, there were a quite a few trades that had to be canceled because they were smaller than 100k. In general, these cancellations left the dealer community long bonds as well. The market backed up as the dealer community sold these positions.

2) New Legislation - PR Senators proposed a "restructuring bill" that would allow public agencies to restructure. This spooked investors who interpreted (wrongly in our opinion) that PR was setting the seeds to restructure their GO debt. In order to make the public agencies truly independent of the Commonwealth then this type of legislation is needed and in many ways makes the GO debt stronger, not weaker.

3) GDB Announcement - GDB announced that they were considering issuing a COFINA 3rd lien even after indicating that they had raised all they needed in the new GO deal. These new monies would help the Commonwealth initiate their economic initiatives.

Time will tell if the administration can stimulate new economic growth on the island.