Chicago, the third-largest U.S. city, may see relative borrowing costs shrink 22 percent from November in a sale of $308 million of taxable general-obligation bonds this week.
The city plans to offer $593 million of debt, including a 30-year taxable segment on which the preliminary yield is about 2.35 percentage points above U.S. Treasuries, said a person with knowledge of the sale. The yield gap has narrowed by 0.65 percentage point since November, when Chicago issued $206 million of taxable debt to yield 3 percentage points above federal bonds, data compiled by Bloomberg show.
For the $285 million tax-exempt portion of the deal, the city is offering 10-year debt yielding 0.85 percentage point above top-rated, benchmark tax-exempt bonds, according to preliminary pricing data.
Demand for munis has reduced spreads for states and localities, Tom Boylen, a trader at Chicago-based Performance Trust Capital Partners, said in an interview. Investors have added $11.4 billion to U.S. municipal mutual funds this year, the biggest yearly start since 1993, Lipper US Fund Flows data show.
“The majority of spreads have compressed in municipals,” Boylen said. “There’s a lot of cash coming to the marketplace and this provides one of the few general-obligation, national names that has some spread to it.”
Thirty-year Treasuries yielded about 2.94 percent today, according to Bloomberg Bond Trader prices. Chicago, a city of 2.7 million people, plans to wrap up the sale tomorrow.
Moody’s Investors Service rates Chicago Aa3, its fourth-highest grade. Last month, the company changed the city’s outlook to negative from stable because of its “outsized pension pressures.”
Retirement costs will take up about 22 percent of the city’s corporate budget by 2016 without changes to the system, Mayor Rahm Emanuel told state lawmakers this month. His recommendations include increasing the retirement age, phasing in higher employee contributions and suspending cost-of-living payments to retirees.