Moody’s Investors Service and Chicago's government are in quite a tiff over the ratings' service decision to downgrade Chicago's bonds to junk status. And apparently they've been going at it for quite a while.
"Help me understand why Chicago is different than Puerto Rico?" Moody’s analyst, Rachel Cortez said during a February 2014 meeting with Mayor Rahm Emanuel, two people there told The Wall Street Journal
The U.S. territory of Puerto Rico, of course, is teetering on the brink of bankruptcy, weighed down by a $70 billion debt burden and questionable financial management for decades.
Emanuel is quite upset with the downgrades implemented by Moody's on Chicago's debt over the past two years.
But Tim Blake, a Moody’s managing director who heads its public pension task force told The Journal that his firm is "rationally applying" its ratings models. “Our job is to make judgments on credit risk as we see it," he said.
Chicago suffers from promising its workers much greater income and health benefits in retirement than it can afford.
Elsewhere on the fixed-income front, bonds have traded in a very volatile manner since May, with the 10-year Treasury yield rising as high as 2.49 percent and falling as low as 2.06 percent.
This rollercoaster ride is likely to continue, says New York Times columnist Neil Irwin
. And why is that, you ask? "There is less liquidity than there once was," he writes.
Increased bank regulation since the 2008 financial crisis has led U.S. banks to curtail their participation in bond markets.
Meanwhile, central banks are a much bigger holders of bonds than in the past, thanks to quantitative easing. But the central banks don't trade frequently, another factor keeping liquidity down.
As for the fundamentals, it's difficult to see anything that will push bond yields much higher soon. The economy is sputtering, with growth totaling just 0.2 percent in the first quarter and the Atlanta Federal Reserve's forecasting model putting second-quarter growth at only 1.9 percent.
Economists don't expect the Fed to raise rates before September.
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