Yield Seekers Look to Illinois Deal

Investors expect the sale of Illinois general obligation bonds later this week to offer higher yields than other issuers coming to market, even after the value of the GOs stabilized with the approval an overhaul of two of the state's four pension plans.

The $750 million issuance is scheduled for Thursday, with Wells Fargo Securities as the managing underwriter.

"The one I'll be taking a watch on is the Illinois deal," a trader in New York said. "Which I'm sure most people will also be looking at."

One of the main reasons investors are paying attention to the Illinois GO is because its credit rating is not as strong as other issuances scheduled for this week. The bonds are rated A3 by Moody's Investors Service, and A-minus by Standard & Poor's and Fitch Ratings.

"Illinois has been one of those credits people have looked at for extra yield," the trader in New York said.

Another trader in New York called the Illinois GO the "big deal" for the week and said that it certainly would be cheaper than other state GOs.

"Illinois is one of the lower rated states," he said. "There is still an issue about their pensions, and what they are going to do. The state of Illinois is one of the cheaper names."

Illinois has been plagued with pension-related problems largely stemming from Chicago's four pension plans. In a report Moody's released on April 10 it said that Moody's adjusted net pension liability for Chicago's four plans was $32 billion, or eight times operating revenue, in 2012.

Illinois approved the reform of two of these pension systems in early April, which put the municipal and laborer plans on a path to reach a 90% funded ratio by 2055. Moody's described this event as "modestly credit positive" in the report.

"Still, even with reform, pensions will continue to weigh heavily on Chicago's credit quality," the report said.

Though the Illinois GO offers an opportunity to add yield to portfolios, investors are concerned that the spreads for Thursday's issuance may be tight.

When Illinois issued $1 billion GO bonds on Feb. 6 the spread for bonds maturing in 2024 over the triple-A benchmark were narrower than the spread for the state's $1.3 billion sale in June 2013. Yields for the Feb. issuance were 129 basis points above the benchmark compared to 165 basis points in June.

Yields were 3.81% for the Feb. 10-year bond, down from 4.46% in June.

"It will be interesting to see the spread on Thursday, but it probably won't be as much spread as the bonds should get," the second trader in New York said.

The first trader from New York cited 2014's low supply as a reason the issuance might be priced up.

"With the lack of new issuance it will be interesting to see where the spreads come out," he said. "Illinois has been one of those issues that had traded cheaper in the past. The spreads used to be much wider compared to now."

Volume fell 26% in the first quarter of 2014 from a year earlier to $62.5 billion, according to The Bond Buyer's data. Weekly issuance has generally hovered between $3 billion and $4 billion.

Janney Capital Markets said in a report released on Monday that this week's selection of issues is of higher quality, although only three states with at least one rating in the A rating category will each be selling debt.

"The Illinois GO should trade somewhat cheaper than the other issuances this week; we'll see if it does," the second trader from New York said.

The state of California will issue a two-part deal totaling $750 million of general obligation bonds on Tuesday, the largest competitive deal of the week. The deal consists of $575 million of tax-exempt GOs and $175 million of taxable GOs. The issue is rated A1 by Moody's, and A by both S&P and Fitch.

The Texas Public finance Authority is scheduled to have $700.2 million unemployment compensation obligation assessment revenue refunding bonds sold on Thursday that are rated Aaa by Moody's and AAA by S&P and Fitch. The New Jersey Economic Development Authority has a two-part $1.2 billion total issuance of school facilities construction refunding bonds coming to market on Wednesday that are also highly rated. They earned A1 from Moody's, A from S&P and A+ from Fitch.

Yields on the long-end maturing in 18-to 30-year rose up to two basis points, according to MMD data. They held steady for bonds maturing in one-to 17-years.

30-year Treasury yields fell one basis point to 3.50% and the two-year notes gained one basis point to 0.40%. The 10-year benchmark was unchanged at 2.71%.

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