Market Close: Zeal for Illinois Fades as State's Paper Abounds

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Illinois primary paper has had a good run.

Just weeks ago, the state held a $250 million competitive offering that saw 10-year bond yields within 95 basis points of the Municipal Market Data AAA scale. That spread was more than 30 basis points tighter than a $1 billion sale in February, and that February deal was still 30 basis points better than a sale in June.

But sales were less aggressive Thursday, with Illinois’s $750 million general obligation bond issuance coming in at yields as much as 125 basis points above MMD. The wider spread could indicate a glut of Illinois bonds in the market this year as credit concerns remain prevalent, traders said.

“A couple things have happened – people are full on the Illinois name and saw that it traded back from those initial prices,” one trader in New York said in an interview. “Retail doesn’t really like those higher prices.”

Yield on Illinois’s 10-year bond was 3.38%, 110 basis points higher than AAA 10-year bonds on Wednesday, according to the deal pricing wire. Bonds maturing in 2027 and 2028 were the cheapest, selling with a yield 125 basis points over MMD. On April 10, the state sold 10-year bonds with a 3.42% yield, when the AAA scale was at 2.47%.

The deal, led by Wells Fargo Securities, follows New Jersey Economic Development Authority’s $1.16 billion deal Wednesday, which carried the state’s recently-downgraded A-plus rating. The Illinois bonds are rated A3 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch.

“Off the heels of the New Jersey transaction which didn’t go that well with the recent downgrade, there was the view that this was a lot of bonds to clear the market,” a trader in California said in an interview. “There may be some concern that there is Illinois supply in the marketplace, so starting above the last scale was a good place to start.”

With a shortage of new supply in the market so far this year, investors have been willing to move down the credit scale in favor of obtaining higher-yielding bonds. Lower-rated issuers like Illinois have been able to capitalize on the low-issue market and price at firmer levels.

“The market technicals are in the favor of any kind of spread product and a lot of credits are the beneficiaries of that,” the California-based trader said. “And now, for the time being, people are willing to give issuers a little more rope than they have in the past.”

Municipal bond yields in the 10-year range have firmed in the past month, down 13 basis points to 2.28% as of Thursday, lagging behind Illinois GOs, which are down 32 basis points this month, according to MMD.

“Spreads have gotten little ahead presently and the state still has substantial issues when you look three to five years out,” Dan Heckman, a strategist at US Bank, said in an interview. “We’re a little hesitant on that credit; we think the progress they’ve made is already priced in.”

Buyers looking for yield in a low-supply market often don’t look at all the intricacies of a poorer credit, traders and analysts said.

“They still have some state tax income tax issues that they’re going to have to renew at the end of the year so it’s a little bit of a wild card to aggressively pursue Illinois at this stage,” Heckman said.

Still, buyers were aplenty, with the deal garnering $2.2 billion in orders from 54 investors, according to state budget director Abdon Pallasch.

“This is one of the lowest rates the state of Illinois has paid in the past decade,” Pallasch said. “We got better rates than last time on the shorter-term paper, marginally higher rates on the longer-term.”

Issues like pensions, tax reform and unemployment still have a way to go in states like Illinois and New Jersey, Heckman said.

After several weeks of reassuring unemployment data, U.S. jobless claims jumped Thursday, adding to economic woes that came to light earlier in the week with a sharp drop in new home sales.

Jobless claims increased 24,000 to 329,000 in the week ending April 19, the Department of Labor said Thursday morning, bringing the four-week average to 316,750. The average is nearly on par with the figure a month ago.

On Wednesday, Commerce Department data showed sales of new single-family homes plunged 14.5% to a 384,000 seasonally adjusted annual rate in March. Sales of new homes were 13.3% below the 470,000 rate in March 2013.

Treasuries remained steady Thursday afternoon, as the 10-year benchmark and the two-year notes were unchanged at 2.70% and 0.46%, respectively.

The 30-year yield inched up one basis point to 3.49%.

Muni yields were mixed Thursday afternoon, with yields on bonds maturing from 2018 to 2019 falling as much as two basis points.

Yields on bonds maturing on the intermediate part of the curve were steady, while those maturing beyond 2040 slid as much as one basis point. The short end of the curve was steady, according to the Municipal Market Data’s triple-A scale.

While bond sales this week are set to touch as much as $7.5 billion, the most in more than a month, issuers like the state of California have been able to price bonds aggressively, offering bonds with lower returns than what traders want.

In the competitive market, Bank of America won the bid on $225 million of Virginia Public School Authority school financing refunding bonds. The deal is rated AA1 by Moody’s, and AA-plus by both S&P and Fitch.

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