By Matt Wirz
Two of the country's largest municipal borrowers asked investors to buy bonds this week, a key test of the $3.8 trillion market where state and local governments turn to fund themselves.
Illinois and New York's Metropolitan Transportation Authority have been marketing about $3 billion of bonds in recent days -- the state to help plug budget holes and the authority to repay debt that is coming due. The MTA found plenty of investors willing to buy bonds Tuesday, but the debt came at a high cost, and it remains unclear how Illinois's deal will pan out, investors and analysts said.
Financial instability in state and local governments has become a national political issue during the coronavirus pandemic, with both President Trump and Senate Majority Leader Mitch McConnell (R., Ky.) questioning bailouts of municipal entities. The reception for the two deals highlights uncertainty about how long the pandemic's economic fallout will last, how much assistance will be made available for municipal borrowers and which ones will be eligible to receive it.
"How these two deals play out will influence the whole low-investment-grade tier in the market," said John Miller, head of municipal-bond investing at Nuveen LLC, which manages about $180 billion of municipal-bond portfolios.
The pandemic has split municipal borrowers into haves and have-nots. Relatively safe issuers, such as Sacramento's municipal electric utility, sold bonds at relatively low interest rates in recent days while others paid dearly, or didn't bother coming to market at all.
The MTA issued about $1.4 billion of bonds on Tuesday, people familiar with the matter said, paying an unusually high interest rate to attract investors' interest. Still, the transaction proved the state-owned operator of New York City subway trains could refinance its obligations in public markets despite a 93% decline in ridership during the pandemic.
The authority delayed the deal in March, when municipal-bond markets shut down as Covid-19 spread, then again last week after New York state announced it would cut aid for the transit system. The authority agreed to pay a yield of 5.25% on some of the new bonds, compared with the roughly 2% investors demanded to own comparable debt in March, according to data from Electronic Municipal Market Access.
Strong investor demand allowed the MTA's investment bank, Jefferies Group LLC, to boost the size of the deal from the $992 million initially planned, a person familiar with the matter said.
Illinois tentatively planned to issue $1.2 billion of short-term debt Wednesday and $1 billion of longer-term bonds shortly thereafter, but the first portion of the deal "has been delayed a bit," said a spokeswoman for Illinois's budget office.
The state was grappling with budget deficits, high pension costs and a shrinking population even before the pandemic shutdowns, and its borrowing costs have soared in their wake. The yield of an Illinois bond due in 2028 has doubled since January to 5.2%, according to data from Electronic Municipal Market Access.
"Illinois is going to be the front line of the trouble in municipal-bond markets," said Bob Brinker, publisher of a bond-investing newsletter for individual investors, who is recommending they stay away from the state and other riskier municipal bonds.
The governor's office is projecting a budget deficit of as much as $7.4 billion next year, and the state has the largest pension shortfall in the nation, pegged at $234 billion by Moody's Investors Service.
The U.S. Federal Reserve has indicated it is willing to bolster some state and local governments by lending to them through a $500 billion facility, but the terms of the program may be too restrictive to do much good, said Mikhail Foux, municipal-bond strategist at Barclays PLC.
"They need to change the language if they want issuers to borrow from them," he said.
The MTA has been negotiating to borrow funds from the federal program through New York state to repay $1.1 billion of debt that falls due over the summer, according to marketing materials for the bonds that the authority sold this week. Illinois has looked into the lending facility and is awaiting further guidance from the federal government, the budget office spokeswoman said.
In government debt markets, U.S. bond yields jumped Wednesday after the Treasury Department announced it would increase the supply of longer-dated debt to pay for spending on response to the Covid-19 pandemic. The 10-year yield rose to 0.709% from 0.656% on Tuesday. Yields rise when bond prices fall.
--Heather Gillers contributed to this article.
Write to Matt Wirz at firstname.lastname@example.org