Illinois plans to sell $1.8 billion of general-obligation debt tomorrow as its relative borrowing costs may increase by almost a quarter.More Sideline Cash Nonsense
The tax-exempt deal for the state, rated lowest by Moody’s Investors Service, includes a 10-year segment that underwriter Jefferies & Co. plans to offer to investors at 1.85 percentage points above benchmark AAA securities, according to a person familiar with the sale.
Illinois’s last general-obligation sale was on March 13 for $575 million, with 10-year securities priced to yield 1.51 percentage points above benchmark tax-exempts, according to data compiled by Bloomberg. That’s 0.34 percentage points below tomorrow’s tentative pricing plan, or a difference of 22.5 percent.
The state has the lowest-funded pension in the U.S., with assets equal to 45.5 percent of projected obligations, Bloomberg data show. Its backlog of unpaid bills to vendors and Medicaid obligations is more than $9 billion.
Investors should get more yield than 1.85 percentage points given those fiscal challenges, John Mousseau, a portfolio manager at Vineland, New Jersey-based Cumberland Advisors, which has $1.2 billion of municipal debt. It doesn’t own Illinois general-obligation bonds.
“The state’s debt should be trading even cheaper,” Mousseau wrote in a report released today. “At some point it is a buy. Not yet.”
I side with Mousseau expecting much higher yields.
However, Tom Spaulding at Nuveen Investments Inc. in Chicago says “With a lot of cash out there, I just don’t see it having a problem getting done at these levels, and can probably get done a little bit better,” he said.
Pray tell where is that cash that Spaulding speaks of? Certainly corporations like Apple have a lot of it, but most of that alleged "cash" is nothing but debt on the balance sheets of corporations. Sorry Tom, but counting cash that is spoken for is simply wrong.
There is also $1.5 trillion of excess reserves at the Fed. However, those reserves, have an associated liability as well. Even if that was not the case there would be a problem of duration match. Do investors want to load up on Illinois debt at 1.85% for 10 years.
Nuveen might, but that does not make it an intelligent thing to do. I see no value here at all.
Mike "Mish" Shedlock
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