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California boosts final muni bond sale as rising yields draw investors

November 22, 2010 |  4:54 pm

California on Monday increased the size of a tax-free municipal bond sale amid strong demand, as investors were lured by the recent jump in yields in the muni market.

Even after lifting the size of the sale to $1.25 billion from $1 billion the state had more orders than it could fill. That means some individual investors will be shut out.

Muni bond yields in general declined on Monday for a second straight session as investors returned to the market.

Muni yields had surged this month amid a rise in longer-term interest rates in general and as states and municipalities nationwide swamped the market with new bonds.

California played a big role in overloading the market last week as it launched debt sales totaling nearly $14 billion, including $10 billion in short-term notes.

After demand for the state’s notes was weaker than expected, Treasurer Bill Lockyer on Wednesday reconfigured the rest of his borrowing plans. The tax-free bond sale completed Monday was originally to total $1.75 billion, but was reduced to $1 billion. At the same time, Lockyer decided to sell more taxable muni bonds, which are popular with institutional investors.

Californiaflag By Thursday yields in the muni bond market reached levels that began to draw investors in from the sidelines. Rising demand drove yields down on Friday, and that continued on Monday.

The annualized yield on the Bond Buyer index of 40 long-term muni bonds nationwide, which reached a 2010 high of 5.51% on Wednesday, fell to 5.34% on Friday and ended Monday at 5.29%.

“We think this is an excellent time to be buying bonds,” said Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn. With yields up, plenty of investors apparently agreed.

In the tax-free bond sale on Monday the state had reserved $525 million of securities for individual investors and $475 million for institutions. But by Monday mid-day orders from individuals alone reached $987 million.

Institutions, such as mutual funds, put in orders for $698 million, also exceeding their allotment.

Because retail demand exceeded supply, “An as-yet undetermined amount of the retail orders will not be filled,” Lockyer’s office said in a statement.

“Decisions on which orders are filled will be based on a variety of factors, including: whether the orders are from California investors, who get priority over non-California investors; timing of the order; size of the order; total amount of orders for the maturity; type of order; and restrictions placed on the order,” according to the statement.

Some institutional orders also will go unfilled, Lockyer spokesman Tom Dresslar said.

The tax-free bonds, which will finance infrastructure projects, were sold in maturities ranging from 2011 to 2040. A sampling of the final yields: 2.66% on the five-year bonds, 4.23% on the 10-year, 5.28% on the 20-year and 5.50% on the 30-year. (The full listing of maturities and yields is below.)

Strong investor demand allowed the state to slightly reduce yields on many of the maturities from what it was expecting as of Friday. The preliminary yield on the 10-year bond, for example, had been 4.26% on Friday.

Still, final yields in Monday’s sale were well above market levels of a month ago.

“We’re grateful for the huge retail demand this deal attracted, and happy to be successfully through a $14 billion-plus stretch of sales,” Dresslar said. “Now we can catch our breath and give the market a breather.”

-- Tom Petruno

Here are the tax-free interest rates the state is paying on the $1.25 billion in general obligation bonds it sold on Monday:

Maturity          Yield

2013                       1.87%

2014                       2.29%

2015                       2.66%

2016                       2.97%

2017                       3.34%

2018                       3.68%

2019                       3.98%

2020                       4.23%

2021                       4.42%

2022                        4.56%

2023                        4.75%

2024                        4.88%

2025                         5.00%

2026                         5.05%

2027                         5.10%

2028                         5.20%

2029                         5.23%

2030                         5.28%

2035                         5.38%

2040                         5.50%