The Bond Buyer has an interesting article discussing the potential for the State of Illinois’ bond ratings to be cut to junk status. The article points to a nearly two year budget impasse, increasingly long list of unpaid bills and ballooning pension obligations as presaging a fall to junk status.
Illinois GO debt is already trading at junk spreads according to the article. In 2016, issuers from Illinois were the fifth largest source of new bond issuance behind California, New York and Texas.
A fall to junk status could have a profound negative impact on the market for State of Illinois bonds. Many mutual funds, ETF’s and bond index funds have rigid rules about not holding any bonds rated below investment grade. Thus a ratings cut to junk may force significant sales by these types of accounts and a ballooning of spreads.
