Barron's

Surging Muni Yields in Chicago Send Warning Signal

Chicago's sale of $900 million general obligation bonds last week came at a high price and has some muni strategists worried about what comes next.

Matt Fabian of Municipal Market Analytics wrote to clients Tuesday:

The deep price concessions made by Chicago to complete its $900M GO sale last week are a point of concern both for the city and for the market at large. Yields near or north of 6.0% represent spreads more than 100bps wider than the city’s last GO sale in January 2016 and are roughly double benchmark 5% AAA nominal yields.

He notes that the city's bonds are trading near Chicago Public Schools, which he thinks is appropriate, but it isn't the way investors typically see things.

The latest pricing has him worried enough that it reminds him of Puerto Rico, circa 2013, when the Commonwealth started to lose access to capital markets. He writes:

The high nominal and relative yield levels draw comparison to PREPA’s beginning-of-the-end 7%’s in 2013, and raise concerns that the city is in the first stages of losing economic market access. MMA does not believe that that has to be the case; however, perceptions of insolvency can be difficult to shake without convincing and sustained positive credit momentum.