Illinois Bond Yields Rise to Nine-Month High

Illinois debt is trading at the highest average yield in almost nine months as investors demand greater returns to hold the securities following credit downgrades by Moody’s Investors Service and Fitch Ratings.

Taxable Illinois pension-obligation bonds maturing in June 2033 traded yesterday at an average yield of about 5.42 percent, the highest since Sept. 17, data compiled by Bloomberg show. The securities averaged about 96 cents on the dollar, down from 101 cents May 17. The yield climbed to about 2.63 percentage points more than benchmark Treasuries, the biggest amount since May 9.

Moody’s cut its rating on Illinois debt to A3, the lowest of any U.S. state and six steps below top-graded, on June 6 after lawmakers left the capital May 31 without passing bills to to reduce a $97 billion unfunded pension liability. The downgrade spurred Democratic Governor Pat Quinn to call a special legislative session on June 19 to consider measures to fix the worst-funded state pension system.

Fitch lowered its rating on Illinois debt on June 3 to A-, the equivalent of Moody’s grade, citing the pension deficit.

The state’s taxable bonds, considered a benchmark by Citigroup Inc., had their biggest monthly rally in at least three years in May as lawmakers took up pension changes from the Speaker of the House of Representatives, Michael Madigan, and from Senate President John Cullerton, both Democrats. None passed.

Since May 31, the yield on the bonds has jumped 0.26 percentage point, the data show.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.

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