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Surging Muni Yields in Chicago Send Warning Signal

Chicago's sale of $900 million general obligation bonds last week came at a high price and has some muni strategists worried about what comes next.

Matt Fabian of Municipal Market Analytics wrote to clients Tuesday:

 The deep price concessions made by Chicago to complete its $900M GO sale last week are a point of concern both for the city and for the market at large. Yields near or north of 6.0% represent spreads more than 100bps wider than the city’s last GO sale in January 2016 and are roughly double benchmark 5% AAA nominal yields.

He notes that the city's bonds are trading near Chicago Public Schools, which he thinks is appropriate, but it isn't the way investors typically see things.

The latest pricing has him worried enough that it reminds him of Puerto Rico, circa 2013, when the Commonwealth started to lose access to capital markets. He writes:

The high nominal and relative yield levels draw comparison to PREPA’s beginning-of-the-end 7%’s in 2013, and raise concerns that the city is in the first stages of losing economic market access. MMA does not believe that that has to be the case; however, perceptions of insolvency can be difficult to shake without convincing and sustained positive credit momentum.
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Tim HollerChicago
Chicago Sun Times

City sells $1.16B in bonds, but pays a heavy price for CPS crisis

Chicago sold $1.16 billion in general obligation bonds Thursday, but paid a heavy price for a school financial crisis made worse by Gov. Bruce Rauner’s veto of a bill promising $215 million in pension help.

The “spread” between Chicago’s interest rate and the interest rate the city would have paid if it had a AAA bond rating ranged from 3.3 percent to 3.5 percent, according to Matt Fabian, a partner at Municipal Market Analytics.

Fabian called it the “worst spread” in recent memory on a city bond deal.

Even more surprising was the fact that the interest rate on Chicago’s general obligation bonds was a “full percentage point” higher than it was a year ago — before the City Council approved Mayor Rahm Emanuel’s plan to slap a 29.5 percent tax on water and sewer bills to save the largest of four city employee pension funds.

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Moody’s: Bankruptcy, Skipping Pension Payments Options for CPS

Matt Fabian, a partner at Municipal Market Analytics, says the city is on the right track, but it’s delicate.

“In general, the city is doing the right things,” Fabian says. “But it’s just started doing the right things. And it’s depending on time to give it more financial flexibility. Maybe it will have that time, and maybe it won’t.” 

He says risks faced by the city and its school system are probably the top two conversations in his professional world.

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