California is Greece? Bond investors don’t think so

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Comparisons between Greece and California were rampant on Wall Street earlier this year -- as in, California is to the U.S. what Greece is to Europe: a deficit-ridden state careening toward fiscal calamity.

But Greece clearly has won that race, if you don’t count as true calamity the Golden State’s temporary need to issue IOUs last summer.

And in recent weeks, while global investors were effectively closing Greece out of the debt market by driving yields on Greek government bonds into double-digit territory, California’s borrowing costs have been falling.

The market yield on the state’s 10-year general-obligation bonds, for example, was at 4.28% on Wednesday, according to a Bloomberg News index. That was down from 4.65% in early April and the lowest since October.

This week, California appears to have benefited directly from Greece’s woes: With global stock markets plummeting on fears of a domino effect of government-debt troubles in Europe, high-quality American bonds were in demand. That allowed the state to sharply boost an offering of power-supply revenue bonds.

Treasurer Bill Lockyer had planned to sell $2 billion of the Department of Water Resources bonds to refinance debt incurred during the state’s electricity crisis of 2001 and 2002, when California was forced to borrow to pay for power.

But after individual investors ordered $1.27 billion of the new securities on Monday and Tuesday -- leaving relatively few for big investors such as mutual funds -- Lockyer was able to bump the size of the deal up to $2.97 billion. That makes it the single largest tax-free muni bond offering this year.

Muni bond yields in general have been sliding since early March. Some of that decline probably reflected the anticipation, and then reality, of changes in the way two major credit-rating firms grade muni debt: Over the last month, Fitch Ratings and Moody’s Investors Service have recalibrated their muni bond ratings to reflect, in Fitch’s words, “a greater degree of comparability” with other credit ratings, such as those on corporate bonds.

The net result was that, overnight, many muni bonds were given higher credit grades. Although the ratings firms cautioned that the changes really weren’t meant to suggest an improvement in the quality of the bonds, to many investors it probably looked that way. California’s general-obligation bond rating from Fitch, for example, jumped to A-minus from BBB.

In recent weeks, muni yields also have tracked declines on other long-term bonds, including U.S. Treasury and corporate issues, as more investors have sought to lock in yields as short-term interest rates stay near rock-bottom.

In the power-bond sale this week, the state paid annualized tax-free yields ranging from 0.92% on bonds maturing in 2012 to 3.80% on bonds maturing in 2022. The interest is exempt from state and federal income taxes.

The power bonds are backed by surcharges paid by customers of the state’s major electric utilities. Because of that backing, credit-rating firms have given the debt higher-quality ratings compared with the state’s general-obligation bonds. Moody’s, for example, rates the power bonds Aa3, well above the A1 grade the firm gives the state’s general-obligation debt.

The benefits of this deal accrue to more than just the state and its bond investors: Refinancing the power-crisis debt will lead to a reduction in the surcharges California consumers pay for electricity beginning in January 2011, Lockyer spokesman Tom Dresslar said.

-- Tom Petruno