First wave of investor orders claims 60% of state note sale

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Yield-hungry individual investors are lining up, as expected, for California’s sale of $8.8 billion in short-term debt this week.

The state already has orders for nearly 60% of the total dollar volume of securities it plans to sell, according to Treasurer Bill Lockyer’s office.

Brokerages marketing the so-called revenue anticipation notes for the state are taking individual investors’ orders today and Tuesday. Institutional investors such as money market funds will put in bids on Wednesday, which is when the final yields on the debt will be set.

At 2 p.m. PDT the brokerages had about $5.3 billion of orders, a Lockyer spokesman said.

There are two series of notes in the deal: One matures May 25; the other matures June 23.

Based on anticipated demand, the state on Friday estimated that the May notes would pay a tax-free yield of 1.25% to 1.50%. The June notes are expected to pay 1.50% to 1.75%.

Not surprisingly, most investors are going for the June notes because of the higher expected yield. Brokerages have nearly $4.8 billion in orders for the June notes, compared with a modest $500 million for the May notes.

Lockyer’s spokesman said the state may cap the June notes at $6 billion.

If individual-investor demand remains robust Tuesday and institutional demand is strong Wednesday, the state could opt to lower the final interest rates it pays on the notes. Individual investors have the option of canceling their orders if they don’t like the yields.

The 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.

Despite a still-dicey fiscal outlook, the state is poised to pay much lower yields on its notes than Wall Street expected a few months ago. That reflects investors’ lack of decent options on other short-term accounts. The average money market fund, for example, pays an annualized yield of just 0.06%.

-- Tom Petruno