Reply to @cate_long at 9.35%, State of IL pays more than double-B Junk bond corporates which are at 6.75% in 20 year. That should a warning
— Patrick (@PDQ5661) June 26, 2013
Illinois, the state with the lowest credit in the United States, had to pay up this week to bring a $1.3 billion general obligation bond offering to market. Reuters reported that the general obligation bonds due in 25 years were priced at 5.65 percent on Wednesday. This was approximately 180 basis points (1.80 percent) over Thomson Reuters MMD AAA, compared to a spread of 138 basis points on Tuesday. In other words, Illinois got spanked hard.
Illinois has massively unfunded public pensions and a huge stack of unpaid bills that make the state less creditworthy and force it to pay higher interest rates when it borrows. But a new study by the Mercatus Center suggests that, since the risk of default for Illinois is very small, the state is overpaying for its bond offerings. The study’s author, Marc Joffe, formerly a Senior Director at Moody’s Analytics, developed a fiscal simulation model that takes into account pension, education and health care payments over time in addition to debt service:
The model results suggest that Illinois state bonds carry very little credit risk and that Indiana’s obligations are even less risky. While Illinois’s fiscal policies are likely to have negative effects on future state residents and implications for other public policies, they are not sufficiently dangerous to worry bondholders.
To establish some history for the state, Joffe looks back to a time when it did default on bond payments in January, 1842: