Illinois Bonds Rally as State Moves Toward Ending Record Impasse

Illinois bonds surged as the legislature moved closer to ending a record-long impasse over the budget, reducing the risk that the state’s bond rating will be cut to junk.

The rally came after the state senate overrode Governor Bruce Rauner’s veto to approve tax increases and the first full-year budget in two years, sending the measures to the House of Representatives. Without a spending plan in place, Illinois had been squeezed by chronic deficits and credit-rating companies warned that they may withdraw the state’s investment-grade rank, a step that could have prevented some investors from buying its debt.

“It does look good — it looks like the momentum is there,” said Gabriel Diederich, a portfolio manager at Wells Fargo Asset Management, which has Illinois debt among municipal bond holdings. “When you get shreds of fiscal management and fiscal prudence, even small steps have been greeted positively.”

The average price of taxable general-obligation bonds due in 2035, the most actively traded, jumped 6.5 percent to 110.5 cents on the dollar Wednesday, the highest since the end of October. That pushed the yield down to 6.36 percent from about 7 percent on July 3. The state’s bonds were the most heavily traded municipal securities Wednesday.

The resolution of the budget impasse is waiting on the Illinois house, which initially passed the measures with enough bipartisan support to override the Republican governor. While the Senate took that step on Tuesday, the House didn’t have enough members present for a vote Wednesday and is set to reconvene Thursday.

The progress was lauded earlier in the week by rating companies including S&P Global Ratings, which previously said it would likely cut Illinois’s debt to junk around July 1 if steps weren’t taken to rein in the government’s persistent shortfalls. Without a budget in place, Illinois had effectively been operating on autopilot, leaving it with a record backlog of unpaid bills and on track to run out of money by August for key expenses such as school funding, payroll and pension contributions.

Wells’s Diederich said he isn’t adding to his holdings despite the action by the legislature.

“It’s been a long time coming,” he said. “I don’t want to act like this was a short-term accomplishment. The market has been waiting a long time for this.”

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