When interest rates go up, it will happen overnight, and you won’t know about it until it’s too late. That’s the predicament the state of Illinois found itself in after it decided to shelve a bond deal literally hours before issuing them Wednesday. Why? Because the market demanded a higher rate of return than the state wanted to pay or could afford to pay.
The state had hoped to raise $500 million (read: money to pay for pensions) with a school and transportation offering. But it got a good dose of sticker shock when it realized how much it would cost in interest payments.
What did state officials expect? Of the 50 states, Illinois has the worst credit rating by Moody’s. It already pays the highest interest rate on its debt. And there’s no indication that it will get its fiscal house in order—the pension debt isn’t going away. This is a clear example of how interest rates can shoot up unexpectedly and ruin a bond deal.
The failure to complete the bond offering could be the canary in the coal mine foretelling what’s to come for others. It may be that sellers of lower-yielding bonds will soon find that the demand from buyers vanishes overnight.