State sets preliminary yields on big muni bond deal

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California, which is launching a $2-billion sale of municipal bonds Tuesday, expects to pay tax-free yields in the range of 2.6% to 4.2% on bonds maturing between five and nine years, and 4.6% to 5.7% on longer-term issues.

The shorter-term yields would be below what the state paid on tax-free general obligation bonds at a $1.3-billion sale in early October. But the longer-term yields would be above what buyers got in that sale, reflecting upward pressure on longer-term interest rates in general since early fall.

So potential investors will have to decide: Is it worth locking up their money for at least 16 years to get 5% or better annual tax-free yields? The double tax-exemption (federal and state) makes a 5% yield worth the equivalent of much higher fully taxable yields, depending on your tax bracket.

In the combined federal and state tax bracket of 34.9% (which begins at taxable income of about $137,000 for couples) a 5% tax-free yield is the same as earning a 7.7% fully taxable yield.

For more details on the bond offering, see this earlier post.

The yields the state provided late Monday are preliminary: They’re estimates that brokers will be giving prospective individual investors on Tuesday and Wednesday. The final yields will be set on Thursday, when institutional investors will bid for the bonds, and could be higher or lower than the estimates. If individual investors don’t like the final yields they can cancel their orders.

Here’s are the preliminary annualized tax-free yields for each bond maturity (all maturities are March 1 of the year listed):
Maturity.....Yield

2012..............1.30%

2014..............2.08%

2015..............2.60%

2016..............3.18%

2017..............3.60%

2018..............3.96%

2019..............4.24%

2021..............4.57%

2022..............4.68%

2023..............4.78%

2024..............4.88%

2025..............4.98%

2026..............5.08%

2027..............5.18%

2028..............5.27%

2029..............5.36%

2030..............5.44%

2035..............5.72%.

-- Tom Petruno