Capital Projects and Bond Oversight

Bond Market Update

June 2017

Market News

Moody’s downgrades Laurel County, KY’s GO Bonds to A2 reflecting uncertainty surrounding the county’s growing debt burden according to according to a ratings action document from Moody’s on June 2. The A2 rating is assigned to the county’s $25.1 million General Obligation (GO) Bonds, Series 2017A. The downgrade and new rating assigned affects $46 million of GO bonds. Moody’s analysis suggests factors that could lead to a credit upgrade include substantial tax base growth, improved fund balances with a trend in surplus financial operations, and a decline in the county’s debt portfolio. Moody’s also indicated factors that could lead to a further credit downgrade include increased debt burden, an erosion of available fund balance and liquidity, and a material increase in contingent liability risk. Moody’s Investor Services, Ratings Action, June 2

Total U.S. nonfarm payroll employment increased by 138,000 and the unemployment rate was little changed at 4.3 percent in the month of Mayaccording to a June 2 news release by the Bureau of Labor Statistics (BLS). The BLS indicated that job gains occurred primarily in health care (24,000) and mining (7,000) respectively. Employment in other major industries such as construction, manufacturing, retail trade, financial activities, and government showed little change over the month. According to the BLS, the change to total nonfarm payroll employment for April was revised down from +211,000 to +174,000 and in March from +79,000 to +50,000. Over the past three months, job gains have averaged 121,000 per month. Bureau of Labor Statistics, News Release, June 2

S&P Global Rating Services and Moody’s Investor Services downgraded the state of Illinois to near junk status, the lowest rating ever for a U.S. state as the long running stalemate over passing a state budget shows no signs of ending according to a June 1 news article in Bloomberg. The state was warned by S&P that it would lose its investment-grade status, an unprecedented move for a state, if by July 1 its government leaders have not agreed on a budget that chips away at Illinois’ massive deficit. Bloomberg indicated that currently, Illinois has over $14.5 billion in unpaid bills, nearly equivalent to 40 percent of the state’s operating budget, and that the state’s ailing pension system has also fueled the decision in this historic downgrade. Despite the lack of a budget and downgrade, Illinois continues to cover the payments due on its debt obligations. However, by federal law, states cannot declare for bankruptcy; making much needed pension reform and passing a budget paramount to firm up the state’s standing in the bond market.Bloomberg, by Elizabeth Campbell, June 1

Fresh off another debt downgrade, Connecticut has a plan to lower their borrowing costs that has left most observers scratching their heads on whether it will work according to a May 17 news article in Governing Magazine. State Treasurer Denise Nappierplans to initiate a plan that will allow the state to start offering investors revenue bonds that are paid back directly from the state’s income tax revenues. Nappier believes that these bonds will be able to receive ratings as high as AAA as a result of having a dedicated revenue stream. According to Governing, these new bonds, called tax-secured revenue bonds, will be offered instead of general obligation bonds which are backed by the state’s general revenue collection. Governing points out that skeptics are questioning the move as a “financial engineering gamble” in which creating something out of nothing does not change the fact that the government has not been fiscally responsible. Still others think that the move is a way for investors to believe they will get their money back with interest because the plan was designed to offer credit with the rating agencies in mind.Governing Magazine, by Liz Farmer, May 17

Interest Rates

Key Rates
5/02/2017
Yields (%) / 6/02/2017
Yields (%) / Change / Direction
Of Change
Federal Funds Rate / 0.90 / 0.91 / .01 / ↑
1-Month LIBOR / 0.99 / 1.08 / .09 / ↑
3-Month LIBOR / 1.17 / 1.22 / .05 / ↑
SIFMA Municipal Swap Index / 0.85 / 0.76 / -.09 / ↓
Bond Buyer 20-Bond GO Index / 3.82 / 3.61 / -.21 / ↓
3-Month Treasury / .833 / .981 / .148 / ↑
6-Month Treasury / .976 / 1.07 / .094 / ↑
2-Year Treasury / 1.27 / 1.29 / .02 / ↑
5-Year Treasury / 1.83 / 1.76 / -.07 / ↓
10-Year Treasury / 2.32 / 2.21 / -.11 / ↓
30-Year Treasury / 3.00 / 2.86 / -.14 / ↓
Source: Bloomberg LP and WSJ (as of 6/02/2017).

Definitions:

London Interbank Offered Rate (LIBOR) – This is the interest rate that international banks charge each other for loans. LIBOR is fixed daily by banks in London.

Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index – This index is comprised of tax-exempt, variable rate bond issues where the interest rate is reset on a weekly basis. The bonds included in the index must have the highest short-term rating (VMIG1 by Moody’s Investors Service or A-1+ by S&P). The SIFMA Municipal Swap Index is used as a benchmark for the floating rate payments in many interest rate swap transactions.

Bond Buyer 20-Bond GO Index – This index is comprised of general obligation bond issues (bonds backed by a government’s full faith, credit, and authority to levy taxes) maturing in 20 years. The index has an average rating equivalent to Moody’s Aa2 and S&P’s AA.