| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Higher Rates Likely For Illinois Bond Sale Amid Fiscal Woes |
By Romy Varghese, Of DOW JONES NEWSWIRES
Illinois will probably have to pay higher interest rates on a pair of taxable bonds it will bring to market starting Tuesday, with a recent ratings downgrade and the state's fiscal woes fresh in investors' minds.
The sales from Illinois, the second-lowest rated state after California, come as headlines build over the impact of the deepest economic slump since the Great Depression on local finances.
"California was probably unfairly punished for a long period of time; now other states are coming under scrutiny," said Peter Demirali, portfolio manager at Cumberland Advisors. "Unfortunately, [Illinois] will have to shoulder a higher interest rate burden than a few months ago," he added.
The Illinois deal isn't big enough to test the broader municipal bond market, but Matt Dalton, chief executive of Belle Haven Investments in White Plains, N.Y., said "it'll be a good indication of the risk tolerance out there."
The recent downgrade and concern about further ratings cuts "has a few people wondering" about the depth of demand for such debt, Dalton said. A key gauge would be if Illinois is able to increase the size of the deal, as California did recently, he said.
Investor interest in municipal bonds and federally subsidized Build America Bonds has been robust so far this year, and strong demand from foreign buyers may mitigate pressure for an increase in rates.
"We hope the market would understand the strength of the Illinois credit," said John Sinsheimer, the state's director of capital markets. He noted that in Illinois, cash flows to general obligation bond payments as the first priority. In California, debt service is the second priority after education.
Illinois will sell $356 million in Build America Bonds and taxable general obligation bonds on Tuesday, with the proceeds used to fund school construction projects. The bonds come due every year from 2011 through 2035. Illinois has about $23 billion in general obligation bonds outstanding.
The second part, $700 million in Build America Bonds, will be sold April 20, with the proceeds for transportation and school projects.
Illinois first sold Build America Bonds in February, said Sinsheimer, and may sell another $1 billion in May.
Unlike the income from traditional municipal bonds, which are exempt from federal and some states' taxes, the interest paid on Build America Bonds is subject to taxation; as a result, they pay a higher rate of interest, which attracts a larger pool of investors. The federal government covers 35% of the interest rate on Build America Bonds, which it hopes to offset through higher tax receipts.
The risk premium, or the compensation over risk-free Treasurys, on 25-year Illinois BABs is around 220 basis points, or 2.2 percentage points, over the 30- year Treasury, said Richard Saperstein, managing director and principal of Treasury Partners, a division of HighTower Securities in New York.
He expects the new Illinois long-term bonds to yield around 235 to 250 basis points over Treasurys, closer to the levels of similar but lower-rated California debt, which yields around 290 basis points over Treasurys.
He sees the new five-year maturities yielding around 165 to 175 basis points over Treasurys, which would be about 10 basis points higher than the risk premium on existing five-year debt.
"The market is making a statement that the state must rectify this deficit," said Saperstein.
Illinois faces a $13 billion budget deficit, half of its general fund revenues in 2011, according to Standard & Poor's, which has the A+ rating on watch for downgrade.
Fitch Ratings last week took a dimmer view of Illinois' budget problems, downgrading the state rating to A- and keeping it on watch for further cuts.
In addition, Illinois has the largest pension shortfall in percentage terms of any state, according to a recent Pew Center on the States report. The legislature has recently passed a bipartisan package that raises the retirement age and length of service for full benefits for future workers, among other provisions. Fitch and Moody's Investors Service say the reform will help the state in the long term, but not in the short term.
Despite these problems, there are plenty of money managers and wealthy individuals who feel comfortable buying Illinois debt--as long as the price is right. Ken Woods, chief executive at Asset Preservation Advisors, said he would be interested in the new bonds if they yield around 300 basis points over 30- year Treasurys.
Demirali said he could see the new Illinois long-term bonds yielding 20 to 30 basis points above the risk premium on existing debt, but he added that demand from foreign investors could push the price down. "What's changing the dynamic, what could be the wild card, is the participation of foreign investors," he said.
Foreign investors diversifying their portfolios have jumped into taxable municipal bonds, particularly BABs. California sold over 30% of a recent $3.4 billion issue to investors in over 20 countries.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@ dowjones.com
(Stan Rosenberg also contributed to this report.)
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