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…
