Muni Investors Celebrate "Juicy" 3.74% Yield On New Illinois Bonds As State Hurdles Toward Bankruptcy

Muni investors seem to be absolutely elated today by the opportunity to scoop up their fair share of $4.5 billion worth of new Illinois bonds due in 2028 at a "juicy" yield of 3.74%...which makes a ton of sense if you can look beyond the fact that the state looks to be on an inevitable collision course with bankruptcy. 

Be that as it may, Wells Fargo Portfolio Manager Garbriel Diederich insists that the new issue "offers a tremendous amount of yield in a pretty yield-starved environment." Per Bloomberg

As the state marketed $4.5 billion of bonds Wednesday, securities due November 2028 are being offered at a preliminary yield of 3.74 percent, according to four people with knowledge of the pricing who requested anonymity because the yields aren’t final. That’s lower than the 3.78 percent yield for the November 2029 portion of last week’s $1.5 billion deal, even though bond prices have slid since then.


Investors said the yields are alluring, with benchmark 11-year tax-exempt debt paying about 2.1 percent.


"The issuer still offers a tremendous amount of yield in a pretty yield-starved environment,” said Gabriel Diederich, fixed income portfolio manager at Wells Fargo Asset Management, which holds $41 billion in municipal bonds, including those issued by Illinois. “Outside of this little supply hump here with this deal, there really hasn’t been much muni issuance before this or likely in the weeks ahead.”

Of course, just a few months ago in July, the state of Illinois narrowly avoided a junk bond rating with a last minute budget deal that included a 32% hike in income taxes.  Republican Governor Bruce Rauner vetoed the budget and called it a "disaster," but both houses of the state legislature voted to override his veto.  Meanwhile, S&P and Moody's were apparently both convinced that the budget deal was sufficient for the state to remain an investment grade credit and all lived happily ever after...

The deal comes after Illinois avoided becoming the first junk-rated state because lawmakers overrode Governor Bruce Rauner’s veto of tax hikes to end a two-year budget impasse in July. The proceeds from Wednesday’s deal, as well as the borrowing last week, will pay down $16.6 billion of unpaid bills that piled up during the budget stalemate.


“Clearly the passage of a budget, the performance of the revenue enhancements with the income-tax, paired with the ability to refinance high-cost payables at much lower levels, is positive for the state,” Diederich said. “But the need for expense and pension reform remains and will be a limiter on this name trading substantially tighter.”

...with bondholders expressing their approval via an insatiable demand for 18-year Illinois risk.

Of course, if all of Illinois' financial problems were solved via one simple tax hike, then someone is going to have to explain to us why the state's unpaid payables balance continues to balloon higher with each passing day and now stands at a record $16,559,494,396.60 according the comptroller's office... 

...which is only a 3-fold increase over the past two years.

Oh, and lets not forget that pesky little $130 billion pension underfunding that will rank pari passu with holders of Illinois' latest "juicy" bond offering when the state inevitably collapses at some point in the not so distant future...

IL Pension

But sure, 3.74% is a great yield relative to other muni issuers...


lester1 Wed, 10/25/2017 - 16:50 Permalink

What idiot would buy illinois bonds ??? They won't be paid back in full because of the mandatory payments the state has to make to pensions !!

Md4 Wed, 10/25/2017 - 17:08 Permalink

Seems mighty cheap considering it's Ellen Whah doing the borrowing.

Prolly shoulda tried to borrow enough to cover all those unpaid bills at 3.74%. Likely never get that again.

Next time, shark rates...

gregga777 Wed, 10/25/2017 - 17:21 Permalink

Why should Gabriel Diederich, fixed income portfolio manager at Wells Fargo Asset Management care? He's not stupid enough to be using his own money to buy Illinausea's bonds. It's other people's money that he's using to temporarily bail out Illinausea's political parasites.

Anon2017 Wed, 10/25/2017 - 18:10 Permalink

If the bond defaults, the bank will be sued by disgruntled investors and Mr. D. wil probably be out of a job. In any event, he shouldn't be talking to the press.  

squid Wed, 10/25/2017 - 18:28 Permalink

To all dumb fuck muni investors.....You won't get your principle back guys. You won't because you are lending to a party that is:1. Broke,2. Getting broker everyday,3. Has no plan on how to stop the bleeding,4. The arithmetic doesn't work. If you lend money to Illinois, you are insane. You won't get it back and don't come crying for a federal bailout. Squid

Muppet Wed, 10/25/2017 - 18:36 Permalink

I dunno.  Consider Puerto Rico's experience... They too had juicy yields as they neared default but then what happened?   Shortly after becoming Speaker, Paul Ryan, led and passed a Bill that U.S. taxpayers will backstop and co-sign all Puerto Rico municipal debt.  This helped PR avoid being declared junk status.  At that time, Speaker Ryan emphasized that the Bill included appointment of a Blue-Ribbon panel of experts who would steer Puerto Rico away from default and therefore U.S. taxpayers had nothing to worry about.    Thus, all the buyers of juicy Puerto Rico yields had their ship come in.  They won the lotto.  Now consider that Puerto Rico isn't even a U.S. State and Puerto Rico follows its own Constitution, not that of the U.S.Thus IMO, jumping on these juicy yields makes good sense because U.S. taxpayers will certainly pay.   Just as U.S. taxpayers will pay to rebuild PR after IRMA.This is a case of been there, done that.