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Traders pushing up state bond yields, but no state issuances on horizon

Wednesday, Aug 6, 2014

* Bad news

Illinois is back in the doghouse among investors in the $3.7 trillion municipal-bond market.

The extra yield investors demand to own 10-year Illinois bonds rather than AAA munis has surged 0.55 percentage point since May to 1.64 percentage points, data compiled by Bloomberg show. The gap grew after lawmakers on May 31 passed a budget with a $2 billion hole. Then last month, the state Supreme Court ruled that government retirees’ health-insurance premiums were shielded from cuts, and Standard & Poor’s changed its outlook on Illinois to negative.

But it has no impact on state sales for now

The penalty may have little immediate consequence. Illinois has no plans to borrow for the rest of 2014, Abdon Pallasch, the state’s assistant budget director, said in an e-mail.

And, obviously, some traders are just too ideological to be smart about investing

Not all investors are shunning the state. With muni yields close to generational lows, investors are shifting into riskier securities such as those from charter schools and senior-living communities. Those bonds are among the most likely to default, according to data from Municipal Market Advisors.

Illinois offers “a better risk-reward trade-off than other parts of the market,” said Lyle Fitterer, who helps oversee $34 billion of munis at Wells Capital Management in Menomonee Falls, Wisconsin. “You’d rather own a charter school than the state of Illinois? You have to take a step back and ask if that makes sense.”


* The Rauner campaign’s response…

“Illinois’ credit rating has been downgraded 13 times under Pat Quinn and now, because of his failed leadership, our state’s economy and finances are still broken. Pat Quinn put special interest politics ahead of Illinois workers. We need to change direction before it’s too late.” – Rauner campaign spokesperson Mike Schrimpf […]

There are real opportunities to address the state’s structural deficit. To do that, we need to shake up Springfield and bring back Illinois – and voters will get that opportunity in November when they elect Bruce Rauner to be their next governor.

You gotta love how they think repeating “shake up Springfield and bring back Illinois” will solve all our problems.

You can’t fix the structural deficit with magic fairy dust words.

- Posted by Rich Miller        

  1. - Anonymoiis - Wednesday, Aug 6, 14 @ 11:13 am:

    ==You can’t fix the structural deficit with magic fairy dust words.==

    But you can win elections with it

  2. - Bill White - Wednesday, Aug 6, 14 @ 11:15 am:

    This quote is true: “You can’t fix the structural deficit with magic fairy dust words.”

    But so is this quote: “What Bruce has gotta try to do is not get in the weeds on a lot of issues.”

    Magic fairy dust does work well for campaigning.

    For governing? Not so much.

  3. - Formerly Known As... - Wednesday, Aug 6, 14 @ 11:17 am:

    This is a self-inflicted wound “after lawmakers on May 31 passed a budget with a $2 billion hole”.

    That was a nice 5 month stretch there where our borrowing costs were actually improving rather than getting worse. Now, back to the routine.

  4. - Formerly Known As... - Wednesday, Aug 6, 14 @ 11:18 am:

    Someone please wake me when our state no longer has the worst credit rating in America.

  5. - Bill White - Wednesday, Aug 6, 14 @ 11:18 am:

    This excerpt from one link is interesting:

    === Not all investors are shunning the state. With muni yields close to generational lows, investors are shifting into riskier securities such as those from charter schools and senior-living communities. Those bonds are among the most likely to default, according to data from Municipal Market Advisors. ===

    Bonds issued by charter schools and senior living communities are among the most likely to default?

    Aren’t those the sectors Bruce Rauner focuses on?

  6. - Mighty M. Mouse - Wednesday, Aug 6, 14 @ 11:19 am:

    ===You gotta love how they think repeating “shake up Springfield and bring back Illinois” will solve all our problems.===

    Vote for the guy who talks in meaningless slogans. That’s the ticket. What could possibly go wrong?

  7. - Demoralized - Wednesday, Aug 6, 14 @ 11:22 am:

    ==You can’t fix the structural deficit with magic fairy dust words.==

    Exactly. And I don’t think the ratings agencies will respond too well to cutting revenue sources to the state, which will create a bigger hole in the budget than exists now and put us even more out of balance.

  8. - VanillaMan - Wednesday, Aug 6, 14 @ 11:25 am:

    We all know how important it is to take someone in a delicate medical condition and shaking them awake. They seem to just snap right back, don’t they?

    I always recommend shaking something that seems to be ready to completely collapse. It knocks off all that stuff just barely holding on. Everything gets better after a good shaking, right?

    Can the shaking already, Mr. Rauner. You’re scaring voters away who are barely holding on!

  9. - DuPage - Wednesday, Aug 6, 14 @ 11:25 am:

    I had read the bond houses are upset not so much about the debt per se as the Illinois decision to REDUCE revenue when they know it will not be enough to pay the bills.

    Rauner: Watch me brush that iceberg out of the way with the front of the ship.

  10. - Anonymous - Wednesday, Aug 6, 14 @ 11:33 am:

    ==The penalty may have little immediate consequence.==

    We’re in the current situation because of statements like this that help us ignore our cognitive dissonance.

  11. - PublicServant - Wednesday, Aug 6, 14 @ 11:33 am:

    I understand the Magic Fairy Dust was imported from his Cayman holdings.

  12. - Oak - Wednesday, Aug 6, 14 @ 11:40 am:

    “Vote for the guy who talks in meaningless slogans.”

    It proved a winner for Hope, Change we can believe in, and Yes we can.

  13. - Neglected stepchild - Wednesday, Aug 6, 14 @ 11:40 am:

    Like re-electing an incompetent boob is going to accomplish anything?

  14. - ZC - Wednesday, Aug 6, 14 @ 11:47 am:

    It has to be asked at some point, does Rauner really believe what he’s saying? Is he in his heart of hearts, in other words, a hard-core “supply sider,” someone who believes cutting taxes on the rich generates its own onrush of productive investment?

    He might you know. Which is a scary thought, that our next governor might be in thrall to an idea now debunked in an introductory college economics class. But never underestimate the power of The Money to cloud the cognitive faculties of the generally-bright .01 percenters. If the last ten years have taught us anything, they’ve taught us that.

  15. - Skeptic - Wednesday, Aug 6, 14 @ 11:53 am:

    VM: Maybe he should be anti James Bond-ish and change it from “shaken” to “stirred”?

  16. - Louis G. Atsaves - Wednesday, Aug 6, 14 @ 12:17 pm:

    The magic fairy dust ideology comes from passing and signing a “balanced’ budget with over 2 billion dollars of red ink. From passing and signing “pension reform” that the Illinois Supreme Court has just killed by calling it unconstitutional. By pretending the multiple bond downgrading episodes thus far still have some kind of a sunny picture. That our bottom feeder rankings are somehow still meaningless.

    I have a number of members of my family in the financial markets. They invest on the basis of the best and safest returns to their clients.

    I’ve never heard ideology enter into that equation. The ideology they live by is “making money” for their clients and themselves.

  17. - PolPal56 - Wednesday, Aug 6, 14 @ 12:18 pm:

    V-Man, nice analogy, and I think you’re on to something.

    Certainly State employees could take a break from the beatings.

    And as far as “magic fairy dust words” go, while we don’t need that, Illinois could sure use some cheerleaders. At least half of our “negative economic climate” is simply due to miasma created by the negativity spouted by Illinois media, pundits and politicians. We have become a self-fulfilling prophecy!

  18. - steve schnorf - Wednesday, Aug 6, 14 @ 8:04 pm:

    Me, at those yields I’m going to look at buying some bonds cause even those better rated revenue bonds default sometimes, state full faith and credit bonds don’t

  19. - steve schnorf - Wednesday, Aug 6, 14 @ 8:50 pm:

    and so 2.7% federal tax free, 4 year maturity, tax bracket yield equivalent to a 4 year 3.6% CD

  20. - Angry Chicagoan - Thursday, Aug 7, 14 @ 6:57 am:

    As long as Pat “Cassandra” Quinn keeps being ignored, dissed or otherwise shunted aside by the courts, Republicans, legislative Democrats, unions and others, our credit rating is going to keep going down. Rauner needs to explain exactly how he is going to do better. Repeating the mantra “I’m not Pat Quinn” may cut some ice in bringing a few people around, but it’s nowhere close to adequate to fix our troubles. And Quinn will effectively have the same advantage if he has another four years in his back pocket and other politicians are therefore forced by default to take some responsibility.

Sorry, comments for this post are now closed.

* Happy Thanksgiving!
* *** UPDATED x1 *** Five unanswered questions
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