* Have you ever offered something for sale and the buyer agreed to the price right away? It’s happened to me a few times and I’ve always felt stupid, believing - with justification - that I should’ve asked for more.
So, let’s go back to yesterday’s press release from Gov. Pat Quinn on the state’s bond sale…
The state received more than $9 billion in bids Wednesday from 145 investors for $1.3 billion in General Obligation bonds. The average interest rate on the bonds was 5.042 percent.
That $9 billion in offers is seven times the amount of the bond issuance.
* The governor lamented the additional cost of the bonds to taxpayers in that release…
“When I took office, my top priority was to enact the first capital construction plan in 10 years,” Governor Quinn said. “Today’s bond sale ensures that the work continues on much-needed improvements to roads, bridges and other infrastructure projects across Illinois. But legislative inertia has a price, and today the price for taxpayers was an extra $130 million. As I’ve warned repeatedly, this is an emergency. That’s why the General Assembly needs to get the job done by July 9 so we can stop the bleeding, prevent future downgrades and jumpstart Illinois’ economy.”
Totally understandable concern.
* The New York Times adds a bit of context…
States and cities across the nation are starting to learn what Wall Street already knows: the days of easy money are coming to an end.
Interest rates have been inching up everywhere, sending America’s vast market for municipal bonds, a crucial source of financing for roads, bridges, schools and more, into its steepest decline since the dark days of the financial crisis in 2008.
For one state, Illinois, the higher interest rates will add up to $130 million over the next 25 years — and that is for just one new borrowing. All told, the interest burden of states and localities is likely to grow by many billions, sapping tax dollars that otherwise might have been spent on public services. […]
The sell-off in the municipal bond market has followed the general rout in the overall bond market, which was set off when Ben S. Bernanke, the chairman of the Federal Reserve, indicated that the strength of the economic recovery might allow the central bank to pull back on its $85 billion-a-month bond-buying program earlier than anticipated.
The Fed was not buying municipal bonds, but the market reacted anyway. Investors expected interest rates to rise, and because prices move in the opposite direction, the values of the municipal bonds they already held dropped.
Investors apparently started selling, not wanting to be the last one out. That caused a flood of bond sales. For the week ended June 19, $3.368 billion flowed out of mutual funds that hold tax-exempt municipal bonds, according to the Investment Company Institute. The outflow for the previous week was $3.236 billion.
Such sell-offs tend to hit the municipal bond market hard because it has many individual investors who buy bonds to hold them, either directly or through mutual funds, rather than financial institutions that trade them quickly.
* So, it’s abundantly clear that Illinois’ bonds most certainly had to be priced yesterday to attract buyers in a crazy market where people were dumping bonds left and right. Totally understandable.
But seven times over-subscribed?
There’s no doubt Illinois would have to pay higher interest rates than other states, but seven times over-subscribed is just ridiculous. The Quinn administration has some real fault here.
* This all reminds me of an old Johnny Rotten quote…
“Ever get the feeling you’ve been cheated?”
I did yesterday.