Salient to Investors:

Lower-rated issuers are benefiting as sinking yields spur investors to stomach more risk.

Debt sold by Illinois issuers is rallying the most in 20 months despite a warning that the state’s pensions may run out of money and drain funding from education, infrastructure and local aid. Moody’s said debt-holders are taking the risk because of their confidence in getting repaid. Fidelity Investments said Illinois is one of seven states with the strongest legal provisions for paying debt service on its general obligations – only South Carolina, Minnesota, Utah, Missouri, Texas and Virginia have equal to or better safeguards. No state has missed payments since Arkansas in 1933.

Paul Volcker, Richard Ravitch et al said Illinois’ pensions are destined for insolvency and may absorb a quarter of the state’s budget in 2015. Their report said the culture of budget gimmickry and short-sightedness pushes costs off to the future, but eventually will be impossible and retirees may lose their pensions as the funds dwindle.

Richard Ciccarone at McDonnell Investment Management LLC said Illinois’ pension deficit and backlog of $8 billion in unpaid bills mean its fiscal prospects may deteriorate further.

Matt Fabian at Municipal Market Advisors said some investors can’t get enough Illinois bonds because they’re cheap, and the risk of non-payment is miniscule. 

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