By: Mark Glennon*
Moody’s says Chicago’s credit is junk bond equivalent, but Fitch and S&P say ‘no.’
Take your pick, but the market now says its junk. One way to look at it is comparison to the two largest corporate junk bond exchange traded funds, HYG and JNK. Both of them are trading with yields under 6%. To make an apples-to-apples comparison, you can skim through current yields on Chicago’s taxable general obligation bonds here at the EMMA site, now usually on their most actively traded list. Most prices have traded down to yields now over 7%. Chicago bonds in general have recently traded about 3% over the benchmark for municipal bonds.
What may be somewhat surprising to readers here is how big the spike in yields (drop in prices) was after the downgrade by Moody’s, shown in the chart to the right. The Illinois Supreme Court decision killing pension reform , the downgrades that would result, and the consequential swap liabilities were widely predicted, here and many other places.
Mr. Market apparently doesn’t read WirePoints or what we read. It’s not that we have any prescience here on the muni market. We don’t. It was mostly links from third parties and public data that we posted here that indicated what was coming.
Same with bad news about Chicago pensions. A very harsh Nuveen Asset Management report a few weeks ago about those pensions got national publicity and probably contributed to the sell-off. When we wrote about it here at the time, an actuary immediately commented that there was nothing new in it. He was right, but, somehow, the story was long ignored before that.
Part of the explanation is that municipal bonds are mostly sold to unsophisticated retail investors by a municipal bond juggernaut centered on ‘buy, buy, buy’. But maybe Mr. Market is also sometimes just a, well, doofus. Like we said three weeks ago when we wrote about what was coming for Chicago Public School bonds, which have since also dropped predictably: Critics of the efficient market theory have a new Exhibit A.
Chicago is scheduled to go back into the bond market on Tuesday and again in June with major new bond offerings. The offerings will be watched very, very closely. Mr. Market, alone, will decide how expensive it will be taxpayers to borrow that money. Let’s hope he’ll be nice, but he’s sure in a foul mood now.
UPDATE 5/18/15: The Tuesday bond sale has been shifted to “day-to-day” status, per Bloomberg.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.