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NJ Appropriated Bonds

Given that the State of New Jersey’s debt capacity to issue new General Obligation (GO) is severely limited, the state’s primary source of debt issuance is Appropriated debt. Unlike GO debt, which is backed by the unconditional guarantee of the state, appropriated debt requires annual allotment of funds by legislators. But because amount of appropriated outstanding dwarfs the GO, we use appropriated debt as a proxy for the State of New Jersey.

Below we look at the spread of appropriated debt over period starting Oct 2016 to the present. We have selected 44 bonds that are uninsured, noncallable, and with maturities between 4 and 11 years. In each case we plot the bonds sale to customer versus a theoretical AAA bond. The result is we calculate the spread. The spread is the measure of additional premium buyers require above the safest bond to capture, among other things, the riskiness of the credit.

Institutional Buyers

Our first graph plots such bonds which were sold to customers in par amounts greater than or equal to 5mm. This is typically the block size associated with large institutional investors. They would represent the “informed” money.

Unfortunately there are not many data points, so it is difficult to make statistical inference. There are only three trades that are tighter than 150 basis points, which could be outliers.

Broader Scope of Buyers

So we broaden the scope by decreasing the trade size to all bonds greater than or equal to 1mm.

The resulting plot seems to confirm the general trend of tightening spreads, potentially indicating improved credit profile on the State of New Jersey. On the other hand it may just indicate general spread tightening of higher yielding bonds due to scarcity and/or liquidity.

Almost all Buyers

Finally we broaden the scope to include all bond trades of 100k par amount and larger. These are customer buys/dealer sells.

This filter provides us with the most amount of data indeed suggesting tightening spread toward the end of 2017, but the recent trend has been a nominal amount of widening again. With the start of 2018, we will likely see additional new issue deals come to market, which will help validate current spread. Based on the trade data a small to medium size deal could potentially clear the market between +110 to +135 spread in the 4 to 11 year part of the curve. Whether these new tighter spreads are warranted require a fundamental credit view of the State of New Jersey. Something we plan take up next.