California to retire $7.75 billion of muni debt that paid lucrative yield to investors
The state of California on Tuesday will pay off a $7.75-billion loan it got from investors last fall. Those investors probably are wishing the state would keep their money a little longer.
Treasurer Bill Lockyer borrowed a total of $10 billion in November via so-called revenue anticipation notes. California typically sells such notes each year to tide it over until tax revenue arrives later in the fiscal year. The securities usually are very popular with individual investors.
When the notes were issued in November, the municipal bond market was in the midst of a brutal sell-off that would extend through mid-January. As investors fled the muni market, Lockyer was forced to boost interest rates on the notes to get the deal done.
That cost taxpayers while producing lucrative returns for investors.
The $7.75-billion worth of notes that mature on Tuesday pay an annualized yield of 1.75%. Because that return is exempt from state and federal income taxes for California residents, it’s equivalent to a much higher taxable yield, depending on an investor’s tax bracket.
Buyers who snapped up the notes earned far more interest than they could have earned parking their cash in almost any other short-term account for the last seven months. Money market mutual fund yields, for example, have remained near zero the entire period.
The other portion of California’s November note sale was in $2.25 billion of securities that matured May 25. Those notes paid an annualized tax-free yield of 1.50%.
The investors who will get the $7.75 billion back Tuesday face slimmer pickings if they’re planning to reinvest the money in other tax-free muni securities. Yields are falling on muni bonds in general as the market continues to recover from the autumn and winter sell-off. The supply of new bonds has been slashed as many states and municipalities have curtailed borrowing.
The yield on a Bond Buyer index of 40 long-term muni bonds nationwide was at 5.15% on Monday, down from 5.36% a month ago and down from its 5.95% peak in mid-January.
California muni bond yields also have declined in recent months, even as the state once again heads into the new fiscal year without a budget.
As for shorter-term muni debt, a number of California cities, counties and school districts sell their own versions of short-term revenue anticipation notes at this time of year. But those securities are yielding far less than the 1.75% peak rate the state had to pay.
Joe Lee, a muni bond trader at De La Rosa & Co., said annualized yields on the new crop of notes from municipalities in the state typically are in the range of just 0.2% to 0.3%.
The city of Los Angeles plans to sell $1.3 billion of notes Wednesday.
-- Tom Petruno
Photo credit: Makaristos