“The hole that New Jersey has dug is rapidly getting deeper and deeper,” says Tom Schuette, partner and co-head of portfolio management at Gurtin Fixed Income Management.

While New Jersey's credit troubles pale in comparison to Illinois, the Garden State's financial stress is also influencing investors, as reflected in recent trading levels.

NewOak Fundamental Credit noted in a March 6 report that New Jersey spreads to the Municipal Market Data's top-rated benchmark have been "grinding wider" and look poised to test its high of 105 basis points set in September 2015. Illinois, the only U.S. state with lower bond ratings than New Jersey, saw its spread reach a new peak 238 bps in late 2016 and was at 215 in early March.

Triet Nguyen, head of public finance credit at NewOak, pointed out that while New Jersey will always trade slightly better than Illinois because Illinois lacks the double-tax exemption offered on New Jersey paper and New Jersey GO paper is scarcer, spreads between the two states had tightened to 60 bps in mid-2015 when market participants began to "fully realize" the extent of New Jersey's pension woes. As the Illinois budget crisis dragged on, spreads between the states widened to an all-time difference of 148 bps in late 2016. Despite the movement, NewOak views Illinois as a better investment.

"Depending on their portfolio circumstances, credit-savvy investors should start asking themselves: which of these two state credits is the better relative value," Nguyen said in the report. "We would view Illinois as a better relative value here, since it's already trading, in our opinion, as a below investment grade credit."

A new report released by the New Jersey Department of Treasury last Friday said the state's long-term debt grew by 12% last year to around $18 billion due largely to growing pension and health benefit liabilities. The report showed that bond debt was down 1% to $42.7 billion as of June 2016, but the state's pension liability grew $1.3 billion to $93 billion.

Gurtin Municipal Bond Management, which sold positions on New Jersey bonds in 2015, tweeted Tuesday in response to the debt report that the state's credit quality has only weakened the last two years.

Tom Schuette, partner and co-head of investment research & strategy at Gurtin, said New Jersey's failure to make sizeable pension contributions in the last 20 years combined with consistent structural imbalanced budgets has exasperated an already credit-challenged state.

"The hole that New Jersey has dug is rapidly getting deeper and deeper," said Schuette. "The long-term problem is so daunting."

Thomson Reuters MMD's Daniel Berger said that New Jersey GO bonds have been trading similar to triple-B rated debt even though the state is rated A-minus by S&P Global Ratings, A2 by Moody's Investors Service, A by Fitch Ratings and A by Kroll Bond Rating Agency. MMD's New Jersey GO debt 10-year spreads have widened to 102 this month compared to 96 in February, according to MMD data. Berger noted that New Jersey appropriation debt spreads have ranged from 190 to 200 this month and are trading "like a speculative grade credit."

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