CREDIT MARKETS
November 26, 2012, 7:44 p.m. ET
By KELLY NOLAN

California has long ranked second only to Illinois in the dubious honor of being the least-loved state among municipal-bond investors.

But since Election Day, some investors have had a change of heart.

On Nov. 6, California voters approved temporary tax increases that Standard & Poor’s estimates will boost the state’s revenue by more than $6 billion over the next several years. The tax rise was a controversial move in the already high-tax state, but it suddenly made California’s bonds more appealing, market participants said. California also passed modest pension changes this year.

Meanwhile, Illinois has done little to address its $83 billion unfunded pension liability. The state had roughly $6 billion in unpaid bills as of the end of September, according to the state comptroller’s office.

That has separated the two states in the minds of some investors. The difference in yield, or spread, between the debt of the two lowest-rated states has increased to its widest point since early March 2011, according to Thomson Reuters Municipal Market Data.

Proposition 30 was pushed by California Gov. Jerry Brown.

Last week, the yield on 30-year Illinois debt was 0.60 percentage point above that of similar California debt. As prices fall, yields rise. The higher the yield, the bigger the perceived risk. On Election Day, the spread was 0.42 percentage point. In July, it was 0.18 percentage point.

“Over the past year, California has done much more than Illinois to help its fiscal situation,” said Tom Weyl, head of municipal research at Barclays BARC.LN +1.10% . As a consequence, “there appears to be decoupling” in the way the states’ bonds are trading.

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