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Investors expected to demand “fatter yields” on new state bonds, but not because of default danger

Tuesday, Oct 20, 2020

* Reuters

Illinois is scheduled to sell $850 million of bonds on Tuesday as investors demand fatter yields for the state’s debt due to increased worries over its deep financial woes, which were exacerbated by the coronavirus pandemic.

Ahead of the competitive sale of general obligation bonds due over the next 25 years, the spread for Illinois 10-year bonds over Municipal Market Data’s benchmark triple-A yield scale has widened by 10 basis points to 281 basis points since Oct. 1.

Howard Cure, director of municipal bond research at Evercore Wealth Management, pointed to “a legitimate fear that the state could go into junk status — although not default on its debt.”

“The state continues to delay tough decisions with a number of speculative revenues as part of its current budget, including additional federal aid, voter approval for a progressive income tax, and more Municipal Liquidity Facility (MLF) debt,” he said, referring to the possibility Illinois, which took out a $1.2 billion cash-flow loan in June from the Federal Reserve’s MLF, could borrow more.

If there’s no danger of default, then the rest is just Kabuki theater.

…Adding… Bond Buyer reporter…

…Adding… Translation…

- Posted by Rich Miller        

  1. - AndyIllini - Tuesday, Oct 20, 20 @ 10:04 am:

    I don’t read that as saying that there is “no” danger of default. Just saying that they could fall to junk status even though a default isn’t necessarily likely, which isn’t unusual. Most junk bonds do not default.

  2. - Candy Dogood - Tuesday, Oct 20, 20 @ 10:06 am:

    ===If there’s no danger of default, then the rest is just Kabuki theater. ===

    Kabuki theater is too upscale of a comparison for the song and dance finance bros put on.

    At best they’re just showing up in Springfield to sell us a monorail.

  3. - Candy Dogood - Tuesday, Oct 20, 20 @ 10:07 am:

    ===“no” danger of default===

    Do you understand what has to happen for a state to default on a GO Bond?

  4. - walker - Tuesday, Oct 20, 20 @ 10:08 am:

    “”If there’s no danger of default, then the rest is just Kabuki theater.”"


  5. - RNUG - Tuesday, Oct 20, 20 @ 10:09 am:

    I believe the various rating houses said a few weeks ago there was basically zero chance of the State defaulting on existing bonds and that there was room to issue more bonds without changing the risk. They just weren’t happy about the uncertainty of the progressive income tax … and lack of a clear direction if it were to fail to pass.

    This is all about extorting the maximum fees for the banks handling the transaction and the maximum yield for the investors. Evennthough there would be a cost to set up to do so, the State would be better off bypassing the bankers and selling the bonds directly themselves.

  6. - RNUG - Tuesday, Oct 20, 20 @ 10:12 am:

    == for a state to default on a GO Bond ==

    If the State didn’t default under Rauner, who would have loved to shed all State debt, it never will …

  7. - Annonin' - Tuesday, Oct 20, 20 @ 10:14 am:

    Really just Wall Street hustle. We are sure folks like Griffy and Uline(aka Roy Moore backer) aren’t wading in to impact pricing. That’s what the beautiful people do.

  8. - Donnie Elgin - Tuesday, Oct 20, 20 @ 10:25 am:

    One notch above junk and already in line for more cash from the lender of last resort …

    “Illinois is set to borrow several billion from the Federal Reserve’s Municipal Liquidity Fund (MLF) for a second time if a new U.S. stimulus package and a progressive tax hike scheme for Illinois don’t come through, according to comments from Illinois Gov. J.B. Pritzker.

    Illinois already borrowed $1.2 billion from the MLF earlier this year in an attempt to close some of the state’s 2020 budget shortfall.

    The borrowing is significant since Illinois is the only state in the country to tap the MLF. The Fed created the MLF in April to be a “lender of last resort,” where cities, states and other government entities can go if they can’t raise money as a result of COVID-19.”

  9. - Lucky Pierre - Tuesday, Oct 20, 20 @ 10:25 am:

    The phrases Kabuki theater, kabuki dance, or kabuki play are sometimes used in political discourse to describe an event characterized more by showmanship than by content.

    Sounds a lot like budget making in Springfield

  10. - yinn - Tuesday, Oct 20, 20 @ 10:33 am:

    Rent-seeking is a reflex at this point.

  11. - Yippie - Tuesday, Oct 20, 20 @ 10:35 am:

    Is it because certain entities legally can invest in “junk” grade bonds and would then have to unload them quickly if the bonds became “junk?” Asking for a friend.

  12. - Candy Dogood - Tuesday, Oct 20, 20 @ 10:40 am:

    ===The borrowing is significant since Illinois is the only state in the country to tap the MLF.===

    Oh, so if the State of Illinois borrows too much can it declare bankruptcy?

    Can the State of Illinois still raise tax rates or levy additional taxes to satisfy General Obligation bonds?

    Do courts still have the ability to order states to honor a contract?

    How does any of what your spewing actually represent a real risk to a GO Bond?

  13. - Hamlet's Ghost - Tuesday, Oct 20, 20 @ 11:03 am:

    “Gaslight Theater” might be a more accurate name for this charade.

  14. - Oswego Willy - Tuesday, Oct 20, 20 @ 11:32 am:

    === If there’s no danger of default, then the rest is just Kabuki theater.===

    This was a Wordslinger point to the silliness. Missed, every day.

    To the post,

    The angst about default is only by those willing to make hay, there’s no reality to the fear.

    Wordslinger’s comments on this, priceless.

  15. - Flying Elvis'-Utah Chapter - Tuesday, Oct 20, 20 @ 11:47 am:

    Anyone who believes a word from Fitch or Moody’s after 2008 deserves every sheering they will get.

  16. - Pelonski - Tuesday, Oct 20, 20 @ 12:09 pm:


    You are on the right track. Whether by rule or policy certain investment purchasers don’t invest in junk bonds and would either not buy them or sell them when they go to junk status. That reduces the demand for the bonds which increases the yields. In my view, the whole concept of “junk status” for a state, except in very dire circumstances, is ridiculous, but that doesn’t change the fact that it does have an impact on yields.

  17. - JS Mill - Tuesday, Oct 20, 20 @ 12:41 pm:

    Many excellent posts, especially from RNUG, on this topic.

    A rational person looks back at the last several economic calamities and understands that a default would require something akin to a return to the medieval period. Bonds would be the least of our worries. Wall Street sticking iot to us because they can.

  18. - Candy Dogood - Tuesday, Oct 20, 20 @ 2:46 pm:

    ===would require something akin to a return to the medieval period===

    I believe we now call this concept “originalism” or “textualism.”

  19. - City Zen - Tuesday, Oct 20, 20 @ 3:16 pm:

    ==Wall Street sticking it to us because they can==

    Should all states pay the same exact rate? Why do the agencies rate the states to begin with if the ratings are meaningless?

  20. - Google Is Your Friend - Tuesday, Oct 20, 20 @ 3:58 pm:

    ==- City Zen - Tuesday, Oct 20, 20 @ 3:16 pm:==

    Moody’s paid a nearly $1 billion penalty for falsifying ratings leading to the Great Recession. They are currently under a DOJ compliance monitor. If you paid them enough, they changed the rules to rate you highly no matter what their own models or analysis actually said.

  21. - RNUG - Tuesday, Oct 20, 20 @ 4:34 pm:

    == Why do the agencies rate the states to begin with if the ratings are meaningless? ==

    a) Because once upon a time, in the middle of the Great Depression, one State - Arkansas - temporarily defaulted on a State backed bond, which was eventually made whole. (I’m ignoring Puerto Rico because it isn’t a State and different rules applied there.)

    b) People try to apply the same criteria to States that are used for businesses

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