California boosts size of IOU sale -- and cuts yields

What credit crunch? Californians are falling over themselves to extend credit to the Golden State, which is floating an offering of short-term IOUs this week.

But robust demand for the tax-free debt will mean lower yields than investors might have hoped.

Treasurer Bill Lockyer today boosted the size of the state’s offering of so-called revenue anticipation notes to $4.5 billion from $4 billion, amid a huge wave of orders from individual investors.

Those orders totaled $3.9 billion by this afternoon, or about 98% of the original $4 billion in securities to be sold.

"We’re obviously ecstatic about the response," said Tom Dresslar, a spokesman for Lockyer. "Given the continued free-fall of the stock market, folks are looking for a safe place to put their money and earn a good rate of return over a short period of time."

But that return also is falling as buyers swarm for the debt.

The state had estimated on Tuesday that the notes maturing on May 20 of next year would pay an annualized tax-free yield of between 3.75% and 4%, and that a second IOU maturing on June 22 would pay between 4.25% and 4.5%.

Today, Lockyer set the preliminary rates at the low end of those ranges: 3.75% for the seven-month notes and 4.25% for the eight-month notes.

And the final yields may be lower: They’ll be determined on Thursday, when the state takes orders from institutions. If demand from those big investors is strong, the state could lower the yields further -- which would be good for all of us as taxpayers, of course.

Individuals have the right to cancel on Thursday if they don’t like the final numbers.

The state needs the cash from these IOUs to patch its seasonal budget shortfall.

Photo: Treasurer Bill Lockyer

Comments

[jdj]

Tom,

Do you think the state put out those extremely optimistic yield numbers out in order to get buyers to "swarm?" When I saw those yields I couldn't believe they would ever be paid.

Thanks

[Tom Petruno]

JDJ: It's a good question. There is always a lot of gamesmanship with these deals. But muni-market analysts told me that, given the lack of buyers for most muni debt in recent weeks, they weren't surprised that Calif. had to dangle high yields to get the deal done. The final yields, as usual, will depend on the institutional investors: If they bid aggressively, the final yields could be substantially lower -- although probably still attractive (relative to taxable yields) for many individual investors. Also remember that individuals have the right to walk away when they hear the final yields from their brokers. So if the state really tries to pull a fast one on retail investors (and low-balls them), many could just say, "No deal." We'll find out tomorrow.
Tom Petruno