Spreads on 10-year Pennsylvania general obligation (GO) bonds have tightened since early July despite legislators’ inability to agree on a revenue package to fund its FY18 budget, but some buysiders said they remain wary.
The Pennsylvania Legislature passed a USD 32bn FY18 budget on 30 June as reported, which Governor Tom Wolf allowed to become law without his signature, as reported. The Legislature has yet to agree on a revenue package.
“Pennsylvania is a weak state,” said Nicholos Venditti, a portfolio manager at Thornburg Investment Management. It “would not be a mistake to speak its name in the same breath” as Connecticut, New Jersey and Kentucky.
While Connecticut is in the news because of Hartford’s troubles, Pennsylvania isn’t generating as much focus, so spreads there are tightening, Venditti said.
“This is irrational, but no one has been punished yet for taking on excess risk at ever-higher prices,” Venditti said. “Until that happens, investors will continue to be blind to risk right up until it slaps them in the face.”
Pennsylvania GOs in the 10-year range traded at 48 basis points (bps) over the AAA MMD curve on Friday (8 September), according to Daniel Berger, senior market strategist at Thomson Reuters Municipal Market Data. That’s down from 55 bps over the curve on 3 July, Berger said.
“There has been a lack of higher-yielding, good-quality bonds, and the lack of a budget has not been a major factor in the trading of these bonds—yet,” Berger said.
Western Asset Management Company, a Legg Mason investment affiliate, hasn’t added to its holdings of Pennsylvania GOs for quite a while and is significantly underweight in the credit, according to Robert Amodeo, head of municipals.
“We’re not anticipating changing that in the near term,” Amodeo said.
Though Pennsylvania already has a penalty imbedded into its spreads, it isn’t wide enough, said Amodeo.
A USD 59.5m tranche of second Series 2016 Pennsylvania GOs traded in small lots on 7 September at 122.461 to 121.861 to yield 2.234% to 2.3%, according to Electronic Municipal Market Access.
S&P Global Ratings placed its AA- Pennsylvania GO rating on CreditWatch with negative implications on 6 July, citing “the commonwealth’s eroding financial position” and a “significant likelihood” that Pennsylvania will fail to enact a structurally balanced budget for fiscal year 2018. Moody’s Investors Service rates Pennsylvania’s GO bonds Aa3/stable.