July 11 Illinois' so-called credit spread for long-dated debt narrowed on Thursday as U.S. municipal bond prices rose and the market digested action by the state's governor on Wednesday to cut off legislators' paychecks until they enact comprehensive pension reform.
The yield spread for Illinois general obligation bonds over Municipal Market Data's benchmark triple-A scale fell by 5 basis points to 145 basis points for bonds due in 20 years, according to MMD, a unit of Thomson Reuters.
For 30-year bonds, the spread narrowed by 10 basis points to 140 basis points.
Governor Pat Quinn used his line-item veto on Wednesday to suspend salaries of state lawmakers, saying he was fed up with legislative foot-dragging on Illinois' nearly $100 billion unfunded public pension liability.
But some traders said the improvement in Illinois' spreads was due more to Thursday's price rise in the $3.7 trillion market, the first since July 3, than to Quinn's move.
"It's definitely nice to see but until we see anything concrete (on pensions) it's not a huge difference," said Dan Solender, head of municipal investments at Lord Abbett & Co.
The continued failure by the state legislature to enact pension reform helped push Illinois' credit ratings to the lowest level among U.S. states. Investors, meanwhile, have been demanding hefty yields to buy the state's bonds.
In the secondary market on Thursday, prices on top-rated, tax-free bonds, which have been sliding lower since July 5, perked up after Federal Reserve Chairman Ben Bernanke's comments late Wednesday that the central bank's accommodative monetary policy was still needed, said Randy Smolik, an MMD analyst.
Yields on 10-year bonds dropped 8 basis points to 2.67 percent on MMD's scale, while 30-year yields fell 5 basis points to 4.01 percent.