State tells investors to expect yields on debt sale at low end of range

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Strong investor demand for California’s $8.8-billion debt sale this week will keep the state’s interest cost on the money at the low end of the expected range, Treasurer Bill Lockyer said Tuesday.

Brokerages had orders from individual investors for $6.64 billion of the short-term notes as of 5 p.m. Tuesday, Lockyer said.

Institutional investors, such as money market mutual funds, will put in orders on Wednesday, which is when the final yields on the notes will be set.

But with 75% of the deal already claimed by individual investors, Lockyer said he expected the state to set the final yields relatively low. There are two series of notes in the deal: One matures May 25; the other matures June 23. Lockyer said investors were advised today to expect an annualized yield of 1.25% on the May notes and a yield of 1.50% on the June series.

On Friday, the treasurer had estimated that the state might pay as much as 1.50% on the May notes and 1.75% on the June notes.

The lower the yield, the bigger the savings for California taxpayers. Lockyer said brokerages had individual-investor orders for $697 million of the May notes and $5.94 billion for the June notes. Investors have the option of canceling their orders if they don’t like the final yield the state sets.

The so-called revenue anticipation notes will bring the state cash it needs to fund spending until expected tax revenue arrives later in the fiscal year. The proceeds also will be used to repay a $1.5-billion loan the state got from JPMorgan Chase & Co. last month.

California is benefiting from investors’ hunger for yield as the Federal Reserve keeps short-term interest rates overall depressed to help the economy and banking system.

The interest on the state’s notes is exempt from state and federal income tax for California residents. Even at 1.25% the notes would pay far more than many other short-term securities. The average money market mutual fund yield currently is a mere 0.06%.

As I’ve noted previously, though, California still is paying a penalty relative to the debt costs of states in healthier fiscal shape.

Texas last month sold $5.5 billion in short-term notes at an annualized yield of just 0.48%.

-- Tom Petruno