July 5, 2017 / 3:46 PM / 2 months ago

UPDATE 1-Illinois bonds trade higher in wake of state budget action

(Recasts first sentence with other debt issuers, adds comments from portfolio manager and MMD analyst, adds details on Illinois House schedule)

CHICAGO, July 5 (Reuters) - A budget breakthrough over the holiday weekend boosted Illinois bond prices on Wednesday and the price lift was spreading to other municipal debt issuers in the state.

A stalemate between Republican Governor Bruce Rauner and Democrats who control the legislature has left the nation's fifth-largest state without a complete budget for two fiscal years. Since fiscal 2018 began on Saturday, lawmakers passed a spending and revenue plan to avoid Illinois becoming the first-ever U.S. state whose credit is rated junk.

Dan Solender, lead tax-free fixed-income portfolio manager at Lord Abbett, said on Wednesday that the price rise on Illinois' bonds in secondary market trading was also happening to debt sold by other issuers in the state, such as Chicago's Metropolitan Pier and Exposition Authority.

"I guess there's optimism that (the state is) making progress," he said.

Over the extended Fourth of July holiday weekend, the Democratic-controlled Illinois House and Senate passed a $36 billion fiscal 2018 spending plan and $5 billion income tax hike aimed at ending a two-year budget impasse.

While Rauner vetoed the trio of budget and revenue bills on Tuesday, the Senate quickly overrode his action.

It is now up to the House to vote to overturn the vetoes and enact the budget and tax hike. The chamber was not able to meet on Wednesday due to the lack of a quorum and is scheduled to return to session on Thursday.

Spreads on Illinois general obligation bonds due in 2025 tightened to a range of 238 to 210 basis points over Municipal Market Data's benchmark triple-A yield scale from a previous 276 basis points, according to MMD. For some bonds maturing in 2029, the spread narrowed to 220 basis points over the scale from 275 basis points.

"It's clearly a pretty big (spread) tightening in the wake of the budget legislation," said MMD analyst Greg Saulnier.

Randy Smolik, another MMD analyst, added that the Illinois bond price rise was "definitely having a ripple effect for other Illinois credits."

Illinois has the widest so-called credit spreads over MMD's scale and the lowest credit ratings among the 50 U.S. states. (Reporting by Karen Pierog; Editing by Jonathan Oatis and Matthew Lewis)

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