California muni bond sale sees weak initial orders

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California’s infrastructure-bond sale this week isn’t off to a strong start -- a sign many investors are unimpressed with municipal bonds after the latest steep drop in market yields.

I noted in this post that the state’s first sale of longer-term general obligation bonds since spring would be a big test of investor demand in the wake the muni market’s hot rally since July.

The brokerages handling the deal for the state took orders from individual investors beginning on Tuesday. Through the end of the day the state had orders worth $361 million for the total of $1.3 billion in longer-term tax-free bonds to be sold, according to Treasurer Bill Lockyer’s office.

So just 28% of the deal was spoken for. By contrast, when the state offered $4 billion in tax-free bonds for sale in March -- when bond yields were much higher -- individual investors grabbed 75% of the deal on the first day of orders.

Demand for $250 million of taxable munis California is selling this week to individual investors also is unimpressive: The state had orders for 25% of that deal on the first selling day.

The individual-investor order period will continue today. Institutional investors will put in bids on Thursday, and that’s when the final yields will be set. Depending on final demand, the yields could be higher or lower than the preliminary estimates shown below.

The state is hoping to raise $4.5 billion in all, including via a large chunk of federally subsidized Build America Bonds it’s expecting to sell to institutional investors on Thursday.

Here are the preliminary yields the state’s brokerages were quoting to investors on Tuesday on the tax-free bonds (interest is exempt from state and federal income tax):

Maturity Yield

2015.........2.87%

2016.........3.10%

2017.........3.42%

2018.........3.64%

2020.........3.93%

2021.........4.04%

2022.........4.13%

2025.........4.38%

2026.........4.45%

2027.........4.51%

2028.........4.56%

2029.........4.63%

-- Tom Petruno