California shifts bond sales as muni yields surge

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

California slashed its planned sale of longer-term tax-free municipal bonds, citing the vicious sell-off in the muni market nationwide in recent days.

The state said late Wednesday that it would offer $1 billion in longer-term tax-free bonds for sale beginning Friday instead of the $1.75 billion it had expected to sell.

The state also canceled a $267-million lease revenue bond sale that had been set for Tuesday.

“The tax-exempt municipal bond market is a cold, cold world right now for issuers and taxpayers,” said Tom Dresslar, a spokesman for Treasurer Bill Lockyer.

Muni bond yields have rocketed over the last week as buyers have turned away amid a glut of supply and as long-term interest rates in general have jumped.

The rebound in yields in the muni market has been head-spinning. The average yield on an index of 40 long-term tax-free muni issues nationwide tracked by the Bond Buyer newspaper jumped to a 16-month high of 5.51% on Wednesday, up from 5.35% Tuesday and 4.96% two weeks ago.

If more would-be issuers follow California and pull back on their offerings it could help the market regain its footing. At the moment it’s totally a buyer’s market, bond traders say.

While slashing the size of the planned $1.75-billion tax-free bond deal, the state said it would boost the size of an offering of taxable bonds, most of which will be sold as Build America Bonds. Interest on those securities is subsidized by the federal government.

Lockyer had planned to sell $2 billion of taxable bonds on Friday. That offering will be raised to $2.75 billion, of which $2.5 billion will be Build America Bonds.

“In an environment where tax-exempt yields keep rising, it’s in taxpayers’ best interest that we cut the tax-exempt offering and increase the savings we can achieve with subsidized BABs,” Dresslar said.

Build America Bonds have become favorites of big-money investors such as insurance companies that normally don’t buy tax-free munis. States and other issuers generally end up paying less overall interest by using BABs than by issuing tax-free bonds. But the BAB program is set to expire at year’s end unless Congress extends it.

The conventional tax-free bonds and the BABs will raise money to fund voter-approved infrastructure projects.

The state almost seems cursed in its timing on debt sales this week. Earlier Wednesday Lockyer delayed completing a $10-billion offering of tax-free short-term notes by one day because of a legal issue unrelated to the sale.

A lawsuit challenging the state’s plans to sell and lease back 11 office properties was filed in San Francisco Superior Court on Tuesday. Without the proceeds from the building sale the state’s projected budget gap would widen, so Lockyer said he was forced to amend disclosure documents to investors buying the state’s ‘revenue anticipation notes,’ or RANs.

The note deal is expected to price on Thursday, after institutional investors place orders. The state said it collected RAN orders totaling $6.06 billion from individual investors over the last three days, a weaker turnout than the $6.64-billion in retail orders placed for similar notes in September 2009.

-- Tom Petruno