Bond vigilantes still a myth
Thursday, Jun 16, 2016 - Posted by Rich Miller
* This was a widely reported belief until today, so I’m not trying to pick on just one guy…
Illinois paid about 4 percent on its last issue, compared with a median rate of 2.34 percent for AAA-rated state bonds, according to Richard Ciccarone, CEO of Merritt Research Services, a provider of research and data on municipal bonds.
But a couple of developments last week suggest the price of profligacy is about to rise. Credit rating agencies Moody’s and Standard & Poor’s cut Illinois’ ratings again, with Moody’s parking the state just two levels above junk status. More ominously, an influential bond investor openly questioned the market’s willingness to indulge a borrower incapable of basic fiscal discipline.
* Today…
Bank of American Merrill Lynch won the deal in competitive bidding, pricing bonds due in 2026 with a 5 percent coupon to yield 3.32 percent, which is 185 basis points over Municipal Market Data’s triple-A yield scale. The spread was 175 basis points ahead of the bond sale, according to MMD, a unit of Thomson Reuters. […]
Muni yields have been hitting new record lows on MMD’s scale in recent days, driven by cash-heavy investors chasing low supply of debt. The true interest cost for Illinois’ bonds, which carry maturities from 2017 to 2041, was 3.74 percent.
With Illinois poised to be the only U.S. state since at least the 1930s to end a fiscal year without a complete budget, some market participants thought the spread should be even wider.
“It’s odd to me,” said Nicholos Venditti, a portfolio manager at Thornburg Investment Management. “Illinois has proven time and time again they can’t get anything done.”
…Adding… But some folks just won’t give up the ghost…
The worldwide rally has pushed Illinois’s 10-year yields down over the past three months by more than a quarter percentage point to 3.3 percent, despite a record-long budget impasse that caused Moody’s Investors Service and S&P Global Ratings to downgrade it last week to the lowest level for a state in over a decade. BlackRock Inc.’s Peter Hayes, who oversees $119 billion of municipal bonds for the world’s largest money manager, suggested investors consider not buying Illinois’s debt to pressure elected officials, a call that didn’t keep the state from returning to the market.
“Clearly the political inaction has soured the taste for many investors,” said Gabe Diederich, a portfolio manager in Menomonee Falls, Wisconsin at Wells Fargo Asset Management, which manages about $39 billion of munis, including Illinois debt. “Investors will lend them money again at a very steep penalty relative to the rest of the market, but with the expectation that ultimately the state will take the appropriate steps to fix their issues.”
…Adding More… Interesting…
- Missed Again - Thursday, Jun 16, 16 @ 12:36 pm:
I guess the Blackrock guy that was trying to drive prices up was wrong.
Anybody got the SEC’s number?
- Anon - Thursday, Jun 16, 16 @ 12:37 pm:
We can pay the debt service.
- wordslinger - Thursday, Jun 16, 16 @ 12:54 pm:
–“It’s odd to me,” said Nicholos Venditti, a portfolio manager at Thornburg Investment Management. “Illinois has proven time and time again they can’t get anything done.”–
Except never miss a bond payment.
And require, by law, that every dime collected in state revenue be dedicated first to bond payments in full, before anything else.
Seriously, you think these “portfolio managers” don’t know that? They wouldn’t be very good at their jobs if they didn’t, would they?
They’re on the long grift.
- Cook County Commoner - Thursday, Jun 16, 16 @ 1:13 pm:
There are a lot of folks rotating out of equites into debt, especially muni debt. A bit surprising that they would pay such a premium on IL paper and drive down the yield to the purchaser.
More importantly, what is this saying about the rest of the investment world. If folks are chasing low grade munis with such gusto, are they saying equities are way over-priced or too dicey for now?
Even more importantly, what does it say about those 7% plus returns the pension plans rely on.
- PublicServant - Thursday, Jun 16, 16 @ 1:16 pm:
===Clearly the political inaction has soured the taste for many investors===
Clearly, not enough.
- PublicServant - Thursday, Jun 16, 16 @ 1:27 pm:
===Even more importantly, what does it say about those 7% plus returns the pension plans rely on.===
History, and actuaries, say average market returns of at least 7% as well as going forward are quite likely…then there’s you CCC.
- Annonin' - Thursday, Jun 16, 16 @ 1:28 pm:
Good job BigBrain…borrowing costs driven up by dopey bond counsel and your antics…griffin and Kline get a little extra juice…make me buy dinner at the club
- Angry Republican - Thursday, Jun 16, 16 @ 1:44 pm:
/sarcasm mode on
Of course negative interest rates on sovereign debt have no influence on US municipal bond sales
/sarcasm mode off
IL can thank Japan, Germany and Switzerland for keeping the cash flowing into the state.
- BluegrassBoy - Thursday, Jun 16, 16 @ 2:37 pm:
Yay! Extra money payable to Bruce’s friends.
Genius.
Atta boy Gov.
- Baruch - Thursday, Jun 16, 16 @ 3:15 pm:
If the coupon rate is 5% that is what the state will pay. If the yield to maturity is 3.32% it means the bond buyers are paying more than the face value of the bonds.
Who gets the premium over the face value, Merrill Lynch or the state of Illinois? Hmmmm
- TinyDancer(FKA Sue) - Thursday, Jun 16, 16 @ 3:30 pm:
“Clearly the political inaction has soured the taste for many investors”
Right…and then they’ll go WHERE for yield?
There is zero chance Illinois defaults .
- Former Bartender - Thursday, Jun 16, 16 @ 3:40 pm:
Baruch, the State gets the bond premium.
- Formerly Known As... - Thursday, Jun 16, 16 @ 3:51 pm:
=3.7425% true interest cost is lowest TIC the state has ever received for a GO bond sale with a similar final maturity.=
That would be the opposite of =bond vigilantes=.
- Six Degrees of Separation - Thursday, Jun 16, 16 @ 4:23 pm:
My 401k has been averaging 9.5% returns over a pretty long period. Can’t complain, and hope the pension investments do as well, for all IL taxpayers’ sake.
- Precinct Captain - Thursday, Jun 16, 16 @ 4:48 pm:
The next two tweets from the reporter, combined for clarity:
“This is rich: “It’s clear from today’s bond sale that investors realize Illinois now has a Governor that is trying to turn the state around and right its fiscal ship,” Rauner folks say..find me an investor who says that’s the reason and not a lovely market or strong GO”
https://twitter.com/Yvette_BB/status/743509461445148672
- Precinct Captain - Thursday, Jun 16, 16 @ 4:49 pm:
Where is the administration data on other “TIC” throughout recent state history?
- Arthur Andersen - Thursday, Jun 16, 16 @ 4:59 pm:
Whether it’s your own IRA or billions of OPM, the worst thing an investor can do is try to “time the market.” More studies than I can count as well as the long-term returns for the Illinois pension funds (9.1% per year 30-year return for TRS, for example) clearly show that the best strategy is to establish a diversified portfolio, stay fully invested in that portfolio, and periodically rebalance.
More recently, a study by Pensions & Investments magazine (the Cap Fax of money management, if you will) revealed that over the last 15 years, a fully diversified portfolio, including stocks, bonds, real assets, private equity and (gasp) hedge funds, made more money with less risk than either a 90/10 or 60/40 mix of stock/bond index funds. In plain English, Warren Buffett is wrong.
- Anon Downstate - Thursday, Jun 16, 16 @ 6:06 pm:
Remember, a couple of days ago there was a US Supreme Court decision on Puerto Rico that basically came out in favor of the creditors (and bond holders).
Now there’s still more litigation ahead of us down the road, but the PR bond holders got some reassurance.
That certainly played a part in the outlook for some of bond purchasers of the Illinois bond issue.
Link is: http://www.bloomberg.com/view/articles/2016-06-14/supreme-court-affirms-that-puerto-rico-is-really-a-u-s-colony
Another link: http://www.nytimes.com/2016/06/14/us/politics/supreme-court-rules-against-puerto-rico-in-debt-restructuring-case.html
- low level - Friday, Jun 17, 16 @ 6:47 am:
Rauner admin statement (reported by Yvette) just shows how inept these people are.