From the WSJ on Wednesday afternoon, provisional details of Illinois’ delayed $3.7bn pension bond sale:
Initial indications on the deal Tuesday showed $6.1 billion in orders, with around a fifth of those coming from international investors, such as sovereign-wealth funds and insurance companies, one market participant said. Read more
Cash-strapped Illinois plans to sell $3.7bn of bonds this week to fund its annual pension bill in a test of broad-based demand for troubled US municipal debt, the FT says. Market participants said the bonds would draw interest in spite of Illinois’ financial problems because the state was likely to offer relatively high interest rates compared with other areas of the bond market, which have rallied significantly. The sale was postponed last week so the state could pay its annual pension contribution.
Another day, another report of municipal bond outflows from mutual funds. From Reuters on Wednesday:
The mass exodus of cash from municipal bonds accelerated to a record outflow of an estimated $5.7 billion in the week ended Jan. 19, data from the Investment Company Institute showed on Wednesday. The redemptions are the most in any week since the ICI, a U.S. mutual fund industry trade group, started tracking weekly investment flows at the start of 2007. Read more
The Illinois state governor’s office has confirmed that the Securities and Exchange Commission is investigating official disclosures over the state’s pension liabilities, the WSJ reports. A Moody’s analyst added that Illinois officials had told him the inquiry was focused on whether the state should have treated future savings on the costs of the pension fund as reductions in current costs, for the purposes of selling municipal debt. Illinois’ system is one of the worst among US states for underfunded liabilities and missed contributions. FT Alphaville has a backgrounder on fixing US state public pensions, including accounting for future savings and assumed returns on investment.
Sing along with us:
From a wilderness of prairies, Illinois, Illinois, Read more
The Securities and Exchange Commission has opened an inquiry into whether the Californian Public Employees’ Retirement System failed to give adequate disclosure of risks in its pension investments, the NYT reports. Calpers, America’s biggest pension fund with $220bn of assets, shed a quarter of the value of its investments during the crisis. The SEC has been studying states’ pension disclosures since an enforcement action against New Jersey last year, concerned over whether weaknesses were hidden from municipal bond buyers. Alongside California, Illinois remains under the spotlight for its poor state finances, the WSJ reports. Its bonds have the widest spreads of any US state.
The cash-strapped state of Illinois on Wedesday will set terms for a bond sale as it seeks to borrow $900m in a test of investor appetite for troubled US local issuers, reports the FT. States and municipalities, which raise money in the $2,800bn municipal bond market, have come into the spotlight after several years of budget deficits and worries about global public finances. While systemic risk from muni default is low, cutting deficits will hard going for many states, writes David Merkel at Aleph Blog.
Here is an arresting graphic (click to enlarge):
This CDS report was written by Markit’s Gavan Nolan
The US municipal bond market is not renowned for its headline-catching abilities. Debt backed by the revenues of US states is viewed generally as a safe, dour asset class. But these admirable properties have come under serious scrutiny in recent weeks. The Markit MCDX, an index referencing 50 municipal CDS, has widened dramatically in response to the rapid financial deterioration of several US states. The index is now trading wider than the Markit CDX IG (see chart above), an astonishing situation given the nature of the borrowers referenced in the respective indices. How did this reversal in fortune come about? Read more
… the documentation looks like this (via Paul Kedrosky).
Illinois governor charged over Obama seat ‘sale’ - FT