Analysts said that high borrowing costs will limit participation in a $500 billion U.S. Federal Reserve short-term borrowing program set up to address state and city revenue shortfalls due to the economic fallout from the coronavirus outbreak, Reuters reported. While Illinois, the lowest-rated U.S. state at a notch above junk, passed a bill late last week authorizing borrowing up to $5 billion through the Fed’s municipal liquidity facility (MLF), legislation is pending in few other states. Cooper Howard, director of fixed-income strategy at the Schwab Center for Financial Research, said sample purchase rates released by the New York Federal Reserve on Wednesday are much heftier than what highly rated governments can obtain in the U.S. municipal market. The Fed “wants to be the lender of last resort,” he said, adding that for lower-rated issuers like Illinois, the program makes more sense. Sample rates for issuers rated BBB-minus or Baa3 like Illinois would range from 3.84 percent for a one-year loan to 3.85 percent for a three-year loan, according to the Fed. That is lower than the current 400 to 411 basis-point spread over Municipal Market Data’s benchmark triple-A yield scale for Illinois bonds with maturities from 2021 through 2023.
