NEW YORK – A combination of Illinois’ $2 billion short budget and the state’s Supreme Court leaning against the General Assembly pension reform has devalued Illinois’ bonds, but not quite low enough for junk bond investors to buy up yet. Bloomberg reports:

dice moneyThe extra yield investors demand to own 10-year Illinois bonds rather than AAA munis has surged 0.55 percentage point since May to 1.64 percentage points, data compiled by Bloomberg show. The gap grew after lawmakers on May 31 passed a budget with a $2 billion hole. Then last month, the state Supreme Court ruled that government retirees’ health-insurance premiums were shielded from cuts, and Standard & Poor’s changed its outlook on Illinois to negative.

Though Illinois is rated six steps below AAA, it trades at near-junk yield levels. That’s still not attractive enough for James Dearborn at Columbia Management Investment Advisers and Patrick Morrissey at Great Lakes Advisors.

There’s a possibility that things could change in November, and that is causing junk bond buyers to hold back – they’re waiting to find out what happens in the election and what the Supreme Court will ultimately decide.

A potential political shakeup from gubernatorial elections in November, considered a toss-up, and questions over the constitutionality of the state’s pension overhaul have bond buyers betting prices will keep falling.

“Illinois’ credit rating has been downgraded 13 times under Pat Quinn and now, because of his failed leadership, our state’s economy and finances are still broken,” said Rauner campaign spokesman Mike Schrimpf. “Pat Quinn put special interest politics ahead of Illinois workers. We need to change direction before it’s too late.”

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