CHICAGO – A review of secondary market trade data and credit default swap spreads on Wisconsin paper detected some market anxiety leading up to Tuesday’s recall election of Gov. Scott Walker, but it did not reveal any widespread angst or change in the value of a state general obligation bond, according to figures compiled by Interactive Data Corp.
The Republican incumbent survived the historic recall Tuesday against his Democratic rival, Milwaukee Mayor Tom Barrett. The recall effort was sparked by Walker’s move to curtail unions’ collective bargaining rights.
The controversial measure was part of a larger package of reforms that also increased employee health care premium and pension contributions and helped move the state’s budget closer to structural balance.
Aside from the potential impact on state finances, the results were being watched nationally as a bellwether for governments looking to rein in the costs of employee retirement and other benefits.
“The possibility of increased market volatility in Wisconsin debt due to this political situation was a justifiable concern among investors,” Interactive Data’s portfolio analysis group wrote in its daily commentary published late last week.
A review of the data suggested some elevated anxiety but did not reveal any widespread concern.
In the days leading up to the election, credit default swap spreads on a five-year contract rose to a peak of 89 basis points on the Monday before the election. They had hovered in the 82 to 84 range between May 21 and May 29 when it then began its ascent. After the election June 5, the spread returned to “business-as-usual” levels and was at 85 basis points on June 6.
The data suggests that the market was watching closely and had some apprehension, but was far from a panic mode that might lead to a shorting of the name. “The rise tells us there was general investor anxiety,” but it was held in check, said Kenneth Lee, a director in the firm’s portfolio analysis group.
The firm’s review also showed a slight drop in the volume of larger trades leading up to the election, “likely due to investors pausing momentarily in the midst of the developing situation,” the report reads.
The review showed little change in the value of state general obligation bonds. The GO yields remained relatively steady before and after the recall election. The firm also reviewed the curve on revenue bonds versus GO bonds and found some slight movement higher after the election, which mirrored the general market trend for similar double-A rated GO credits.
The ratio between customer buying and selling and inter-dealer trades throughout the election review period – May 30 to June 6 -- also remained relatively stable.
Wisconsin’s $7.5 billion of outstanding GOs carry mid-double-A ratings and a stable outlook.
Walker’s 2012-2013 budget sharply reduced the use of non-recurring revenues, though the two-year $66 billion budget did rely on $337 million of debt restructuring to help eliminate a $3 billion shortfall. Walker primarily eliminated the red ink with cuts.
Fitch Ratings said in a special commentary Wednesday it doesn’t expect changes to the state’s fiscal and budgetary direction following Walker’s victory.
Fitch noted the progress towards structural balance and said its “focus will continue to be the ability and willingness of management to balance revenues and expenses without depending on one-time measures.”
