California's big debt sale drawing heavy demand
Investor demand is so strong for California’s sale of short-term debt next week that the state may pay as little as 1.25% on one chunk of the securities.
JPMorgan Chase & Co., which is managing the sale of $8.8 billion of so-called revenue anticipation notes for the state, told Treasurer Bill Lockyer today to expect to pay annualized tax-free yields of 1.25% to 1.50% on the notes maturing in May and 1.50% to 1.75% on the issue maturing in June.
Those estimates are based on the level of demand JPMorgan is hearing from brokerages that are pitching the notes to individual and institutional investors. The greater investors’ appetite for the securities, the less the state has to pay. That saves taxpayers money.
As recently as last week, some municipal bond analysts thought the yield on the notes might be closer to 2.5%. And in mid-summer, when the Legislature and Gov. Arnold Schwarzenegger were battling over how to close a $24-billion budget gap, the expectation was that investors would demand a penalty rate of 5% or higher if the state tried to issue short-term debt.
But with rates on other short-term investments near zero -- money market mutual funds pay just 0.06%, on average -- California is benefiting from investors’ desperate search for yield. It also helped that credit-rating firms Moody’s Investors Service and Standard & Poor’s early this week gave high quality ratings to the notes.
The state usually borrows via short-term notes in late summer or fall to bridge the gap between its current spending needs and the receipt of tax revenue later in the fiscal year, which ends June 30.
Brokerages will formally take note orders from individual investors on Monday and Tuesday. Institutional investors will put in their orders on Wednesday, and that’s when the final yields will be set. The interest on the notes is exempt from state and federal income tax for California residents.
Although California will be paying less than it feared, it’s still getting dinged compared with states that are in much healthier fiscal shape.
When Texas sold $5.5 billion in short-term notes last month it paid an annualized yield of just 0.48%.
-- Tom Petruno