California expects to pay high yields on short-term notes

It looks like California will pay a steep price to borrow short-term cash to patch its seasonal budget shortfall.

The state’s pain is your gain, if you’ve got money to put to work.

Treasurer Bill Lockyer this morning announced the range of tax-free yields the state expects to pay on so-called revenue anticipation notes that will be sold Thursday:

-- For the notes maturing on May 20, 2009, the annualized yield is expected to be between 3.75% and 4%.

-- For the notes maturing on June 22, 2009, the state expects to pay between 4.25% and 4.5%.

Because those returns are exempt from state and federal income tax for California investors, they’re very juicy compared with interest rates on other short-term securities.

A 4% tax-free yield, for example, is equivalent to a fully taxable yield of 5.88% for a couple in the 32% combined state and federal tax bracket (which begins at taxable income of $89,629).

"These are unusually high yields," said Matt Fabian, senior analyst at Municipal Market Advisors in Westport, Conn. Because the credit crisis has hit the municipal bond market particularly hard, "Everybody’s paying through the nose," he said.

The state is expected to sell up to $5 billion of the notes in all.

How the sale works: Individual investors are invited to place orders today and Wednesday. Institutional investors then bid Thursday, and that’s when the final yields are announced.

Individuals who aren’t satisfied with the final yields can cancel their orders Thursday.

The minimum investment is $5,000. Investors must place orders via a brokerage (the state doesn’t take orders directly).

For more on the notes, go to Lockyer’s website, here.

For a basic primer on buying California municipal bonds, go here.

Comments

[Jorge%20I.%20Gomez]

I think the news is short on substance. The news should have some information as to whom people can talk about the program if interested.
Somebody in the budget's office should have all the information, to include, but not limited, to companies that will handle the program.

[Tom Petruno]

Jorge: If you click on the link I provided at the bottom of the post, you will be taken to the prospectus for the deal. Page six of that publication includes a list of the brokerages underwriting the note sale. However, virtually any brokerage (including many discount brokerages) should be able to place an order for you. And FYI, one of the two main underwriters is Banc of America Securities, a unit of Bank of America.

[Can't find it either]

Sorry, Tom, but after looking at your links and clicking on virtually every possibility, I still can't find a list of brokers authorized to sell these bonds, just lots of general info on how to choose a broker and info on bonds.

I agree with Jorge that it would have been much more helpful to provide a direct link to these names. (If anything, reading the "how to choose a broker" info creates more confusion, since apparently if you choose a broker who doesn't have that bond "in inventory" he has to go to a broker who does and then becomes "an agent," which presumably means you're paying extra overhead...)

I pulled my money out of speculative investments 6 months ago before this all hit the fan so I'm not currently working with anyone. And don't think much of the ones I've had at major firms, who've steered me to accounts where they get the most incentive for themselves. "Safe" money in a bank account earning some interest has been better than losing big in the stock market, but these yields would tempt a lot of us to help the state in a win-win situation.