California sells $2.4 billion of bonds amid falling yields
The drop in yields curbed demand for the bonds from individual investors, but buying by institutional investors such as mutual funds allowed Treasurer Bill Lockyer to issue nearly the full amount planned.
The state said it sold $2.37 billion of tax-free general obligation bonds to refinance previously issued bonds and pay off other debt.
Individual investors put in orders for $655 million of the bonds on Friday and Monday. Institutions bought $1.74 billion of the deal on Tuesday.
When it issued bonds in November the state paid an annualized tax-free yield of 4.23% on 10-year securities in that offering. This time Lockyer set the yield on 10-year bonds at 3.17%, more than a full point less. Yields were lower across the board on bonds of other maturities as well.
Although California’s credit rating remains the lowest of any state, the budget passed by the Legislature in June has given investors more comfort about the state’s fiscal outlook, Lockyer spokesman Tom Dresslar said. “We believe the budget has helped constrain the price” of borrowing, he said.
Credit rating firm Standard & Poor's in early July raised its outlook for the state’s rating to “stable” from “negative,” saying the state's plan to balance its budget was "largely realistic."
It also has helped California that muni bond interest rates in general have tumbled this year, along with yields on U.S. Treasury bonds, as the economy has weakened and many investors have favored bonds over stocks for safety. The 10-year Treasury note yield was at 1.94% on Tuesday, down from 3.30% at the start of the year.
But falling yields have pushed some individual investors to the sidelines because they believe the returns aren’t high enough to justify the risk, analysts say. Small investors are “deeply unhappy” with muni yields now, said Matt Fabian, analyst at research firm Municipal Market Advisors.
Orders from individual investors in Tuesday’s California bond sale were well below the nearly $1 billion they put in for the November sale, although this time around bonds of certain maturities were available only to institutions. The state said it raised yields on bonds maturing between 2013-2016 and 2022-2028 by as much as 0.05 percentage points from its initial estimates to get the deal done.
With the steep drop in muni yields this year “the market is not very conducive to doing a bang-up retail business,” Dresslar said. Still, he said, the state was “very pleased” with the demand it saw.
The state plans another general obligation bond sale in mid-October, although the amount hasn’t been determined, Dresslar said.
Some investors may be shying away from muni bonds because of President Obama’s proposal to limit the amount of muni bond interest that high-earners can exclude from their taxable income beginning in 2013. The proposal would help pay for the economic-stimulus program in the jobs bill Obama sent to Congress earlier this month.
But Congress could quash the idea. Lockyer and other state officials already have raised objections, warning that the move could mean investors would demand higher yields on muni bonds, driving up state and local governments' cost of issuing debt.
-- Tom Petruno
Inset photo: Treasurer Bill Lockyer. Credit: Armando Arorizo/Bloomberg News