Oct 24 (Reuters) - Puerto Rico's beaten-down debt is rallying, and the Caribbean island's sales-tax bonds now sport yields that could be low enough to entice government finance officials to sell new bonds.
Puerto Rico's $70 billion of municipal bonds are widely held by mutual funds dedicated to tax-free debt. But the commonwealth has been forced to pay high yields because of its faltering economy and chronic budget gaps.
A spokeswoman for was not immediately available on Thursday to comment on possible bond sales.
Tax-free yields on long-maturity COFINA bonds, named for the Spanish-language acronym for the commonwealth's sales-tax agency, sometimes trade well below 7 percent, or more than 1 percentage point lower than early last week.
Puerto Rico Treasury Secretary Melba Acosta Febo last week told Reuters that the island, which throttled back its issuance plans amid steep increases in interest rates demanded by investors, might consider new debt deals when yields dipped under 7 percent.
COFINA, whose debt is backed by sales taxes collected in Puerto Rico, is one of the island's best-regarded credits, even after Moody's Investors Service three weeks ago downgraded $6.8 billion of senior sales tax revenue bonds to A2, around the middle of the investment-grade scale. By contrast, Moody's rates Puerto Rico's $10.6 billion of general obligation bonds at Baa3, just one notch above junk, and other U.S. ratings firms have similar ratings.
Two weeks ago, Puerto Rico expanded COFINA's borrowing capacity by $2 billion.
On Thursday, yields on a 2046 COFINA maturity with a 5 percent coupon traded to yield 6.43 percent, down from 7.4 percent on Oct. 16, a day after Puerto Rico finance officials briefed institutional investors on the island's spending, borrowing and issuance plans.
"A strong rally in Puerto Rico's COFINA bonds followed a recent investor call," said institutional investor Robert Amodeo at Western Asset. "Despite all munis performing well recently, COFINA outperformed the general market."
A COFINA zero-coupon issue maturing in 2054 traded on Thursday to yield 6.55 percent, down from 7.35 percent a week ago, according to Municipal Market Data.
In the week through Wednesday, yields on Puerto Rico's 10-year GO bonds narrowed 2 basis points to 8.63 percent, as comparable AAA-rated issues tightened 12 basis points to 2.53 percent. Puerto Rico's 30-year GO yield has dropped to 7.85 percent since Oct. 1, when it was 8.12 percent.
Analysts at Citigroup Global Markets credited much of the rally in Puerto Rico's debt to last week's investors briefing but warned that any new issuance by the island "would require high single-digit yields to clear the market."
Mikhail Foux and other Citigroup analysts said in a research note that Puerto Rico's rates, which are by far the highest of any big U.S. municipals issuer, would be eased if the island's Government Development Bank was given access by Washington policymakers to the U.S. Federal Reserve's discount window.
Such an action, or putting in place a program like 2008's Temporary Liquidity Guarantee Program for U.S. corporations, "would restore investor confidence overnight, buying time for recently introduced reforms to work out," the Citigroup analysts said.
So far this year, facing a spike in the yields on the U.S. municipal bond market, the Caribbean island has relied on short-term private placement loans, a strategy that could prove to be risky, said Peter Hayes, head of the municipal bond group at BlackRock.
"If Puerto Rico can't access the market or if the rate they pay is too high, that becomes a problem," he said. "Short-term, private placement loans is a worry in so much as they rely on other areas of financing to keep funding operations."
(Reporting by Michael Connor in Miami; additional reporting by Tiziana Barghini in New York; Editing by Dan Grebler)