California raises bond deal to $6.5 billion as buyers flood in

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Ravenous investor demand allowed California today to boost the size of its infrastructure bond sale to $6.54 billion from a planned $4 billion, and to close out the deal a day early.

The offering, the state’s first sale of longer-term bonds since June, didn’t come cheap for taxpayers: The longest-term bond, maturing in 2038, will pay investors an annualized tax-free yield of 6.1%.

By contrast, California paid a yield of 5.3% on bonds of that maturity in the June sale.

Still, the deal allowed Treasurer Bill Lockyer to make a dent in the state’s backlog of voter-approved bonds to be sold, and to provide funds for building projects stalled by months of budget wrangling in Sacramento.

‘Investors stepped up and showed their confidence in California,’ Lockyer said.

They also showed that, with federal income tax rates expected to rise for the well-heeled, high tax-free yields are hard to resist -- even though California has the lowest credit rating among the 50 states.

Interest on the bonds is exempt from state and federal income tax for California residents. For someone in the 32% marginal state and federal tax bracket, a 6.1% tax-free yield is equivalent to earning 9% on a fully taxable bond, such as a corporate issue.

‘There’s plenty of appetite for [California] bonds -- it just depends on the price,’ said Marilyn Cohen, a bond expert and head of money management firm Envision Capital Management in L.A.

The state knew it had more than enough demand after its brokerage syndicate took in $3.2 billion in orders Monday and early today just from individual investors. Rather than wait for institutional-investor orders on Wednesday, as planned, Lockyer opened the door for those orders today and closed out the deal.

The bonds were sold in maturities of four years to 29 years. The bulk of the dollar amount of the deal was issued in the longest-term bonds, which typically are favored by institutions such as mutual funds.

The state sold $1.2 billion in 29-year bonds, for example. By contrast, it sold just $89 million in six-year bonds. The relatively modest supply of shorter-term securities will mean that some individual investors who ordered bonds in those maturities will come up empty-handed.

Lockyer could be back in the market with another bond sale in late April, a spokesman said. The next issue could be either taxable bonds under the new federal Build America Bonds program, or another tax-free issue.

The state has a backlog of $61 billion in general obligation bonds to sell.

Here are the final annualized tax-free yields on today’s sale:

Maturity Yield

04/01/2013 3.20%

04/01/2014 3.70%

04/01/2015 4.05%

04/01/2016 4.25%

04/01/2017 4.50%

04/01/2018 4.75%

04/01/2019 4.90%

04/01/2020 5.00%

04/01/2021 5.20%

04/01/2022 5.40%

04/01/2023 5.50%

04/01/2024 5.60%

04/01/2025 5.65%

04/01/2026 5.70%

04/01/2027 5.75%

04/01/2028 5.80%

04/01/2029 5.85%

04/01/2031 5.95%

04/01/2033 5.90%

04/01/2035 6.00%

04/01/2038 6.10%

-- Tom Petruno