Written by Rick Ackerman, Rick’s Picks
Investors Can’t Resist The Smell of Garbage
With central banks around the world ready to hit the panic button, investors are scrambling desperately for yield ahead of the next orgy of global easing. How desperate are they? So desperate, in fact, that even some of the bond world’s smelliest garbage – i.e., debt paper issued by Illinois and the city of Chicago – is attracting sufficient buying interest to lift bond prices and push down yields.
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A dearth of supply has caused investors to get a little crazy, according to Justin Land, chief municipal strategist at Wasmer, Schroeder & Co:
“The muni market is not showing a lot of discipline in pricing, because there’s so much money chasing so few bonds.”
Would you plunge head-first into this financial landfill just because everyone else is doing it? Land’s firm evidently has no qualms despite the fact that Illinois paper carries the lowest rating of any state, and Chicago is not far behind. Both consistently spend more than they take in, and neither has a clue about how to turn things around.
Not Just Illinois
Like most of the money being borrowed by state and local governments these days, whatever Illinois raises will go mainly into distressed pension plans. Chicago Mayor Rahm Emanuel took another route in his last fiscal act as mayor, however, foregoing a $10 billion bond that had been earmarked for pensions. This task will fall to his successor, who could conceivably have the distinction of presiding over the bankruptcy of America’s third-largest city.
If investors clamoring for Illinois debt just to eke out a few extra basis points know better, they certainly are not acting like it. Their heedless behavior is not confined to Illinois either; it is happening all over the country, pushing muni bond funds higher and yields to their lowest levels since last August. Although it’s a shot in the arm for financially strapped cities, investors’ inattentiveness to risk suggests the muni-bond binge will not end well.
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