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...