State begins sale of $1.75 billion in tax-free bonds

California retail investors were breaking down the doors to get a piece of the state’s last big tax-free-bond deal, in early March.

They’re getting another chance to buy today and tomorrow: The state this morning launched an offering of $1.75 billion in general-obligation bonds, with securities maturing between one and 30 years out.

The yields on the bonds, however, look like they’ll be significantly lower than what the state paid at the sale in the first week of March. Bond dealers said this morning that the market’s expectations were for a 4.25% yield on the 10-year bonds, down from 4.58% at the last sale. The 30-year bond is expected to yield about 5.1%, down from 5.4% at the last sale.

The state will take retail orders today and tomorrow; the final yields will be set on Thursday, when institutional investors bid. To buy, you have to go through a broker. The state has a list of participating brokerages on its website, buycaliforniabonds.com.

Yields were sharply higher at the March bond sale because that deal followed a dramatic sell-off in municipal issues in general — a byproduct of the credit crunch. I explained what was happening then in this column.

The muni market has calmed significantly since then, which has helped pull yields down. Still, the interest rates remain attractive for many California investors. Because muni yields are exempt from federal and state income tax for California residents, a 4.25% tax-free yield is worth the same as a fully taxable yield of 6.16% for someone in the 31% federal and state marginal tax bracket. (That bracket begins at taxable income of $70,921 for a married couple filing jointly.)