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Demand exceeds supply as state wraps up $8.8-billion debt sale

Investors’ desperation for decent income played into California’s hands this week, as the state wrapped up its mammoth sale of $8.8 billion in short-term debt.

The offering drew total demand of $9.23 billion, as institutional investors today fought to get the relatively little that was left over after individual investors snapped up most of the securities.

Treasurer Bill Lockyer said institutions such as mutual funds bid for $2.59 billion of the notes. Those investors will get just $2.16 billion of what they sought because Lockyer said he would fill all of the $6.64 billion in prior orders from individual investors.

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As expected based on the state’s guidance late Tuesday, Lockyer set the final yields on the two series of notes at the low end of the initial predicted range. The notes that will mature May 25 will pay an annualized tax-free yield of 1.25%; the notes maturing June 23 will pay 1.50%.

Those are paltry returns, but they beat what investors can find on most other short-term fixed-income securities -- which is why the turnout for the note sale was so huge, despite the state’s weak overall credit rating. The average money market mutual fund yields a mere 0.06%.

"People are really hungry for yield," said Marilyn Cohen, head of bond investment firm Envision Capital Management in L.A.

A year ago, amid the financial markets’ meltdown, California had to pay an average yield of 4% to borrow via short-term debt.

Lockyer figures that the state saved $15.5 million in interest costs on this week’s deal relative to what he might have had to pay if investor demand had been weaker.

That nearly covers the $16.2 million in commissions the state paid the brokerages that handled investor orders for the notes.

Lockyer also spent $600,000 on radio and newspaper ads to drum up interest in the offering. The ads ran in California and also in New York, Miami and Dallas.

The securities in this deal, known as revenue anticipation notes, 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.

-- Tom Petruno

 
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