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Foreign buyers help boost California bond sale

March 25, 2010 |  2:33 pm

California on Thursday wrapped up its sale of $3.4 billion in mostly long-term bonds to fund voter-approved  infrastructure projects, helped by robust demand from yield-hungry overseas investors.

Foreign institutions put in orders for $1.2 billion of the deal, or 35%, according to Treasurer Bill Lockyer’s office. That was the biggest share of a California deal sought by foreign investors in at least a year and probably longer, a Lockyer spokesman said.

At a time when investors in general are balking at buying lower-yielding U.S. Treasury bonds, California was able to sell bonds at a smaller premium above Treasuries than it did last October -- despite the state’s weak credit rating.

The state “saw an opportunity, and they went for it,” said Joe Lee, a muni bond trader at De La Rosa & Co. in Los Angeles.

Bearflag As for investors, Lee said he believed that many institutional buyers were feeling better about California bonds because they expected the credit rating on the debt to rise: One of the major ratings firms -- Moody’s Investors Service -- plans to change the way it grades muni bonds, a move expected to upgrade the lowest-rated issuers.

California’s bond offering this week was composed of taxable issues rather than traditional tax-exempt debt. The sale was primarily aimed at institutions such as pension funds and insurance companies, which typically buy only taxable bonds. Strong demand allowed Lockyer to boost the sale from an originally planned $2 billion.

The state sold 30-year taxable bonds at an annualized yield of 7.48%, or 2.7 percentage points above the 4.78% yield on 30-year U.S. Treaury bonds earlier Thursday.

That 7.48% yield was higher than the 7.36% the state paid on 30-year taxable bonds in October, but relative to Treasuries, the state got a better deal: It had paid a premium of 3.35 points over Treasury yields in the October sale.

California also saved money by again tapping the federal Build America Bonds program, which allows state and local governments to issue taxable debt that is partly subsidized by the Treasury. A total of $2.5 billion of the $3.4 billion in bonds sold Thursday were Build America issues. The U.S. will reimburse the state for 35% of the interest cost on those bonds for the life of the securities.

On the 30-year bond that paid 7.48%, the Treasury subsidy means the net interest cost to the state is 4.86%. That is well below the 5.65% yield the state paid on conventional tax-exempt 30-year bonds it sold March 11.

Not surprisingly, California has been the single biggest issuer of debt under the Build America Bonds program.

-- Tom Petruno