Investors who hold Illinois credits have not reacted to the state's Supreme Court's ruling that retiree health care subsidies are protected by the state's constitution, but market participants anticipate a spike in Illinois trading on Monday.
Trading on all Illinois bonds is 48% below its 100-day average, according to data provided by Bloomberg. Trading levels have been low for the entire muni market all week due primarily to holiday-driven short-staffing. Investors believe Illinois credits will be actively traded when market participants return to work on Monday, and when the Court's decision is more publicized.
"We haven't seen any [market reaction to the Supreme Court's decision] yet. Volume is extremely light today and we expect it to affect all Illinois credits," a trader in Chicago said. "This [decision] is a giant albatross hanging over the state. I don't think there will be any positive take out of this for state of local Illinois credits. Today is not going to be a good reflection of [reaction to the decision], because half the people are out. Look on Monday or Tuesday."
Trading on the state general obligation bonds is 42.9% below its 100-day average, and 79.3% below its 100-day average for city of Chicago bonds.
On Thursday the Illinois Supreme Court reversed a lower court's decision to dismiss litigation that challenged Illinois' overall of retiree healthcare subsidies. The state Supreme Court decided that the subsidies are protected by the state constitution.
A second trader in Chicago said that "obviously this is a credit negative".
"The pension issue is the biggest issue is the state and city, and the rating agencies have been tough on [Illinois] credits," he said. "This puts pressure on the credit."
The second trader in Chicago noted that Illinois is still a liquid credit, and expects the credit to still trade.
Volume came in at $2.8 billion this week, up from a scheduled $1.8 billion. Next week volume is estimated to remain low at $3.5 billion.
John Dillon, managing director at Morgan Stanley, said he does expect supply to "dip when we get into the heart of summer", keeping with seasonal patterns.
The largest deal for next week will come from the competitive market for $300 million of Massachusetts School Building Authority anticipation notes. The deal is rated MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's and F1-plus by Fitch Ratings.
"Massachusetts credits have been received pretty well, it's a strong credit to have in the market," the second trader in Chicago said. "There was an uptick in transportation issuances in June that were well received. The credits are good and the market likes DOT deals."
Transportation volume was $5.9 billion in June from 49 issuances, up 161.6% from $2.3 billion in 42 issuances in June 2013, according to data from The Bond Buyer and Ipreo.
The largest deal in the negotiated market for the coming week will be a $250 million private activity bond offering from the Indiana Finance Authority. The bonds are set to mature serially from 2025 to 2046. The deal is rated BBB-minus by S&P and BBB by Fitch Ratings.
Munis yields rose up to three basis points Thursday amid light trading, according to both the Municipal Market Data and Municipal Market Advisors triple-A scales Treasuries weakened on Friday, with the 30-year yield and the two-year note falling two basis points each at 3.48% and 0.52%, respectively. The 10-year benchmark slipped one basis point to 2.65%.
The employment report showed nonfarm payrolls rose to 288,000 for the month of June from 217,000 the previous month. The number is notably higher than analysts' predictions, which forecast nonfarm payrolls to come in at 211,000.
The second Chicago trader said the market was brushing off the headline number and focusing on the average hourly earnings change shown in the report. Average hourly earnings month over month change stayed at 0.2%, the same as the previous month and perfectly in line with analysts' predictions.
"The jobs number came in huge compared to the survey on the surface," he said.
"With the improvement in unemployment we thought bonds would sell off sharply but the number most people are looking at is average hourly earnings and that's been flat. It's a big inflation indicator. It was a good jobs report for the economy, but not a huge function on fixed income."
