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California short-term debt deal more than half sold on first day

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Yield-hungry individual investors on Tuesday put in orders to buy more than half of the short-term notes that California is selling this week to raise cash.

Brokerages handling the deal for state Treasurer Bill Lockyer said they had orders for $3.05 billion of the notes, or 56.5% of the planned $5.4-billion deal, by late afternoon.

The brokerages will continue to take orders from individual investors on Wednesday. Institutional investors will bid for what’s left on Thursday, which is when final interest rates will be set.

The state is preliminarily estimating that the nine-month notes will pay an annualized tax-free yield of between 0.40% and 0.55%. Because that interest is exempt from state and federal income taxes it’s equivalent to a higher taxable yield, depending on an investor’s tax bracket.

The yield range on the notes also is above what some other state and local borrowers have paid to borrow via short-term securities recently. Last month, Texas sold $9.8 billion of notes at an average annualized tax-free interest rate of just 0.27%.

Still, California is paying much less than it did on the $10 billion of notes it sold last November, when the muni bond market nationwide was rocked by worries about state and local governments’ finances. The state paid an annualized 1.75% on the notes that matured in June.

This time around the muni bond market is relatively calm, and short-term interest rates in general are well below their levels of last fall. One-year U.S. Treasury bills pay a yield of less than 0.10%.

California and many other state and local governments issue so-called revenue anticipation notes, or RANs, at this time of year to bridge the gap between their cash needs and the arrival of tax revenue later in the fiscal year. California's notes will mature on June 26, 2012.

Lockyer had planned to sell RANs in August. But fearing that the debate in Washington over the federal debt ceiling might rile financial markets, he chose to borrow first from major banks to have the money in hand, and sell notes later to retire the bank loan.

The state on Tuesday also launched a sale of $432 million in longer-term muni bonds for the California State University system. Individual investors put in orders to brokerages for $208 million of the bonds, or 48%, Lockyer said. Institutional orders will be taken on Wednesday. Preliminary tax-free yields on the bonds range from 0.32% on one-year debt to 4.56% on 31-year bonds.

On Friday the state will begin offering $2.6 billion in general obligation bonds to investors, the first such sale since November. Proceeds will be used to refinance debt previously issued to finance voter-approved infrastructure projects.

Because of its protracted budget woes, California has the lowest bond ratings of any state, at A1 from Moody’s Investors Service (tied for last place with Illinois) and A- from Standard & Poor’s.

But both Moody’s and S&P gave the state’s short-term notes their highest possible ratings. Credit rating firms typically grade short-term debt based on the amount of cash the borrowers are expected to have on hand when the securities mature.

Lockyer’s website, buycaliforniabonds, has more investor information on the state’s debt sales.

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-- Tom Petruno

 
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