Illinois Bonds Surge with $1.8B Sale Amid Muni Rally

Key Takeaway

• Illinois accelerates a $1.8 billion bond sale due to strong demand, receiving over $12 billion in orders amid a muni market rally.
• The state's improving credit grade and investor appetite for yield contribute to the sale's success, with tax-exempt bonds selling at 66 basis points over benchmark.
• This bond issuance reflects narrowing credit spreads and heightened demand within the $4 trillion municipal market.

Illinois Seizes Market Momentum

Illinois capitalized on an improving credit rating and a buoyant municipal market to expedite a significant $1.8 billion debt sale. The state managed to sell $1.55 billion in tax-exempt bonds and $250 million in taxable debt, earmarked for capital projects and an accelerated pension payment program. This move came on the back of receiving over $12 billion in orders, a testament to the strong demand, with retail investors alone contributing $1.5 billion. Illinois, despite being the lowest-rated state in the U.S., has seen a remarkable turnaround with nine credit rating upgrades in the past three years, moving away from the edge of junk status.

Market Dynamics Favor Illinois

The municipal market rally significantly contributed to the favorable reception of Illinois' bond sale. Yields on AAA-rated state and local debt maturing in 10 years have tightened, moving from nearly 2.8% on May 1 to 2.6%, marking six consecutive sessions of tightening, as per Bloomberg data. This tightening of yields reflects a broader trend in the $4 trillion muni market, where credit spreads are narrowing, and demand is increasing. The bond sale, being the largest of the week, underscores a period of heightened issuance and growing investor appetite for municipal bonds.

Credit Spread and Investor Appetite

Illinois' tax-exempt, 10-year bonds were sold at a 66 basis points penalty over benchmark securities, a significant tightening from the preliminary pricing spread of 75 basis points. This adjustment not only highlights the strong market demand but also positions the state's credit spreads among the tightest in recent history. The bond sale's success is indicative of a broader market trend where large deals, backed by a credible credit story and offering additional yield, are exceedingly well-received. This growing investor appetite for substantial deals has been a notable feature of the market dynamics this year.

Street Views

• Dan Solender, Lord, Abbett & Co. (Neutral on Illinois debt):

  "The recent muni market rally also played a role in the positive reception."

• John Miller, First Eagle Investments (Bullish on large deals with sound credit stories):

  "Large deals with a sound credit story behind them and some meaningful amount of extra yield are doing extremely well this year... The demand comes out of the woodwork and surprises people."

Management Quotes

• Paul Chatalas, Director of Capital Markets for the State of Illinois:

  "Illinois received tremendous feedback from the bond market... Based on this very strong demand, the State accelerated its pricing to capture positive momentum." "The final result showed some of the tightest credit spreads the state has received in recent history."