The recent ratings downgrades by both Moody’s and S&P Global Ratings have placed the State of Illinois general obligation bonds on the edge of becoming junk. As of this writing, the ratings are Baa3/BBB-/BBB by Moody’s, S&P and Fitch.
The fiscal struggle endured by Illinois has indeed been a long one, now yields for Illinois G.O.s have finally begun to widen with the impetus of the downgrades. While there has been a spread between investment grade bonds and Illinois G.O.s the muni market kept the yields for these bonds relatively consistent up until now. Yield blindness or stated another way, the insatiable search for yield coupled with the low supply of higher yielding bonds has kept many weaker credits including Illinois from seeing higher spreads.
Chart 1: Yields of the S&P Municipal Bond Illinois General Obligation Index and the S&P Municipal Bond Investment Grade Index:
S&P Dow Jones Indices tracks approximately $8.5billion of State of Illinois G.O.s in our indices. The table below provides a snapshot of the percentage those bonds represent. Note: Under S&P Dow Jones Indices methodology, the lowest rating determines if the bonds remain in the investment grade indices or are shifted to the high yield category.
Table 1: Percentage of total par value the State of Illinois G.O. bonds represent in select indices:
For more information on S&P’s bond indices including methodologies and time series information please go to SPDJI.com.
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