* Reuters…
Illinois general obligation bond prices plummeted and yields soared in the U.S. municipal market on Thursday, a day after a federal judge ordered the cash-strapped state to find more money to pay Medicaid providers.
Yields on bonds due in 2024 climbed to 5.15 percent in secondary market trading, according to Municipal Market Data, while Illinois’ so-called credit spread over MMD’s benchmark triple-A scale jumped to as much as 380 basis points.
“It’s a real meltdown today,” MMD analyst Randy Smolik said.
He added that spreads over the scale widened by as much as 100 basis points for some bonds issued by Illinois, which already had the widest spreads among the 50 states.
*** UPDATE *** Press release…
With state bonds being downgraded twice last week and a federal court ordering Illinois to find money for Medicaid payments just yesterday, municipal bond analysts are shook over the state’s worsening fiscal crisis under Bruce Rauner’s failed leadership. One analyst was not mincing words about the tumult breaking out among investors, telling Reuters: “It’s a real meltdown today.”
This comes as the state has reached day 708 without a budget and the bill backlog is estimated to reach $16 billion by the end of the fiscal year on June 30. In the meantime, Rauner continues his media tour around the state to promote an agenda that even Republicans admit won’t help get our state back on track.
“It’s no surprise that our dire fiscal situation worsens each day under Bruce Rauner’s failed leadership,” said Pritzker campaign spokeswoman Jordan Abudayyeh. “While investors are panicked, Rauner remains unbothered as he tours the state to promote his teardown agenda that ultimately won’t solve our budget crisis. It’s clear Rauner’s priorities are with his special interest friends and wealthy corporations instead of the Illinoisans who will continue suffering because of his failures.”
- Puddintaine - Thursday, Jun 8, 17 @ 1:45 pm:
Okay! I’m ready for the bad news now.
- Muni Guy - Thursday, Jun 8, 17 @ 1:48 pm:
The bond market has been in meltdown over Illinois debt for several years. The willingness of all parties to take the State to the brink of junk status has unnerved market participants. Particularly given the implications of junk status to interest rate swaps, and the penalty payments required. It is amazing everyone seems willing to put the citizens and taxpayers of Illinois at financial risk for their political posturing. The municipal is asking if there are any adults in Springfield? Unfortunately, it appears the answer to that is, NO.
- cdog - Thursday, Jun 8, 17 @ 1:54 pm:
Hopefully that’s a good enough return for Big Money.
There is a point where this doesn’t seem like a collision of political ideologies anymore.
Maybe this chapter will be called, “When Hedge Funds Ruled the World.” /s
- wordslinger - Thursday, Jun 8, 17 @ 2:00 pm:
MG, this is different. Citigroup put a “strong buy” on Illinois debt just two weeks ago.
The judge’s comment yesterday, for the first time, put in doubt the state law that bond holders get paid first and in full.
- Annonin' - Thursday, Jun 8, 17 @ 2:04 pm:
Mr/Ms Wordslinger is keeeerect
Judge toses some losses on 1%er/Wall Street crew. Actually has no impact on state payments to bond holders just the guys/gals hustlers. Guessin’s some of DopeyDucts 65 conflict play in this area.
- Anonymous - Thursday, Jun 8, 17 @ 2:07 pm:
big payday for Citadel Fortress
- Triple fat - Thursday, Jun 8, 17 @ 2:19 pm:
For some reason this news arouses my curiosity as to the amount of income the Governor will report for 2017. Odd, don’t you think?
- No Raise - Thursday, Jun 8, 17 @ 2:19 pm:
One of the better articles analyzing the state debt scenarios. Interesting reading.
http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1055&context=djclpp
- A guy - Thursday, Jun 8, 17 @ 2:21 pm:
That’s enough basis points to go back to the old way of just stating percentages in more whole numbers. Like 3.80%
That’s 20 basis points away from 4%.
- CapnCrunch - Thursday, Jun 8, 17 @ 2:22 pm:
“big payday for Citadel Fortress”
Illinois general obligation bond prices plummeted……..
Only if they were shorting Illinois bonds.
- My New Handle - Thursday, Jun 8, 17 @ 2:24 pm:
Appears there are some good profits to be made on state bonds. I wonder who is getting them.
- cdog - Thursday, Jun 8, 17 @ 2:33 pm:
We will never see anymore than the front and back of the Rauner’s 1040. No schedules, no K-1s, etc.
- Anonymous - Thursday, Jun 8, 17 @ 2:37 pm:
Dear Captn,
Citadel makes it on the trades and market making. Derivate instruments with bond payments stripped out are fluctuating as funds sell which are prohibited from owning technically junk bonds. Big money being made.
- Anonymous - Thursday, Jun 8, 17 @ 2:43 pm:
The Judge’s comment yesterday put into doubt the statutory priority of the existing payments being made by the State over the federal consent decree mandated payments to medicaid providers. If agreement is not reached between the parties and the Federal Judge orders the Comptroller to make increased payments to medicaid parties, it is not clear whether the constitutional protections for debt service would supersede a federal judge’s order. I’d guess there would be some interesting federal/state issues, similar to why a federal bankruptcy court cannot preside over a state bankruptcy. The State has pledged it’s full faith and credit, and taxing authority, which unlike Detroit, still has capacity to raise.
- CapnCrunch - Thursday, Jun 8, 17 @ 2:43 pm:
“Citadel makes it on the trades and market making. …..”
Good point. I didn’t think about that.
- RNUG - Thursday, Jun 8, 17 @ 3:13 pm:
== While investors are panicked, Rauner remains unbothered … ==
Why shouldn’t he be calm if he and his friends are buying at a discount?
- AC - Thursday, Jun 8, 17 @ 3:33 pm:
If you’re thinking that, as a retail investor, that there’s an upside to all the destruction going in around you in high yield Illinois bonds, think again. The closest thing that seems to exist are ETFs with a small percentage of Illinois GO bonds. Thrown in the mix of those ETFs will be all kinds of municipalities in other parts of the country that can legally declare bankruptcy. Buying Illinois GO bonds directly is difficult and pricey for non-wealthy individuals, so the fees would significantly reduce any potential gains. This opportunity, which may not be a great one depending on how the court decisions play out, is really only for large investors.
- Sue - Thursday, Jun 8, 17 @ 3:34 pm:
For CDOG and Word- if the rating agencies take their ratings down one more step to Junk- the so called big money will be selling in droves. Institutions like pension funds are for the most part prohibited from owning non-investment rated paper. If Moodys and S&P follow up on their recent statements Illinois will be the first state since the 30’s to have a non-investment credit rating. As long as the constitution continues to require bonds to be paid ahead of everything else- the triple B paper will be a good investment for individuals but institutions won’t touch the stuff.
- Three-Finger Brown - Thursday, Jun 8, 17 @ 3:48 pm:
Remember that $7 billion bond they wanted to issue to repay vendors? Assuming 10 year life, today’s little jump cost the state around $200 million in interest payments.
They most likely will be forced to issue that debt once the judge tells them to pay up in a few weeks. The interest rate will almost certainly be higher then, since Moody’s would probably give them a junk rating after the hearing.
- California Guy - Thursday, Jun 8, 17 @ 4:09 pm:
@wordslinger
If the Federal judge can force the State to make Medicaid payments, despite Illinois having a law on the books that requires bondholders get paid first, what does that mean for pension payments? I am ignorant as to how that works. Also, where are you seeing the judges comments that put the viability of the law (under Federal view) into question?
- RNUG - Thursday, Jun 8, 17 @ 4:12 pm:
As -No Raise- referenced at 2:19pm, it is a good article about all the complexities of attempting to allow State bankruptcies. Does a good job of explaining the interaction of the Federal Contract Clause, including issues of trying to make a retroactive change.
This sentence in the closing paragraphs is probably the best summation of the current status:
As dysfunctional as state governments may
sometimes seem, it is far from clear that unelected generalists on the federal bench can make superior financial decisions, much less that those decisions will be perceived as legitimate by affected state citizens.
- RNUG - Thursday, Jun 8, 17 @ 4:17 pm:
- California Guy -,
Go read the article that -No Raise- linked to. Yes, it is about 45 pages and is more on the issue of whether or not States should be allowed the bankruptcy option, but it is a complex topic.
The bottom line is that there is no super clear cut answer … but the courts have, generally, favored the pensioners over the bond holders when it came to giving a haircut.
- Sad Sack - Thursday, Jun 8, 17 @ 4:23 pm:
With all the debt obligations of Illinois, I wouldn’t buy Illinois GO bonds outside a 3-year maturity for any price.
- RNUG - Thursday, Jun 8, 17 @ 4:25 pm:
I will admit this is getting interesting. Have to wonder exactly how far a Federal judge will go.
Will they end up just ordering the Medicaid bills be paid first?
Or will they go further, recognizing the lack of revenue, and actually order a tax increase?
Right now I would bet on the first action … although I get the feeling that Rauner would be just as happy if the second action happened, because then the needed tax increase would not be ordered by him.
- RNUG - Thursday, Jun 8, 17 @ 4:40 pm:
== Also, where are you seeing the judges comments that put the viability of the law (under Federal view) into question? ==
It’s all going to come down to which comes first, legally: State Constitutional Clauses (pensions), State Laws enacted by the State Legislature (bonds), or the Federal Contract Clause as interpreted by a Federal judge? Generally, you can assume Federal Supremacy, but there are exceptions.
Looking at it from the viewpoint of the retiree, the framers of the Pension Clause may have been anticipating this very day when they EXPLICITLY invoked contract law:
SECTION 5. PENSION AND RETIREMENT RIGHTS
Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired. (Source: Illinois Constitution.)
So which contract is more important? I guess the judge will tell us …
- California Guy - Thursday, Jun 8, 17 @ 4:55 pm:
@RNUG
During the Stockton CA bankruptcy labor unions complained because the Federal judge could order cuts but COULD NOT order a tax increase. I’m assuming that logic would apply to States. The California Legislative Analyst’s Office did a report on muni BK and affirmed that…
“Second, the court cannot compel a locality to sell its assets or increase tax rates in order to raise revenues to meet its obligations.”
At least, that’s how it works in muni BK. Not sure if that’s applicable to a State’s situation.
- Anonymous - Thursday, Jun 8, 17 @ 5:04 pm:
Contracts will be diminished. We need them to be.
- Deadbeat Conservative - Thursday, Jun 8, 17 @ 5:10 pm:
=Contracts will be diminished. We need them to be.=
Taxes will be cut - oh yeah, they already were. In Gov’s opinion the state didn’t need that revenue stream.
- RNUG - Thursday, Jun 8, 17 @ 5:21 pm:
- California Guy -
Typically, cities don’t have any taxing power unless granted such by the state. Hard to order a city to do something that is not allowed under state law.
States, as part of their sovereign existence, have the ability to tax.
Right now, it is a contract law question, not a bankruptcy question … and a question about how far a judge will go in enforcing their orders.
- RNUG - Thursday, Jun 8, 17 @ 5:46 pm:
Adding, in a lot of cases it comes down to legislative intent. And as Kanerva and SB-1 observed, the intent of the pension clause was crystal clear.