California sells out $5.4-billion debt deal at low end of yield estimates

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Investors’ scramble to earn a reasonable return on their cash helped California sell out an offering of $5.4 billion in short-term notes earlier than expected -- and at the low end of expected yields.

The state said it completed the debt sale on Wednesday, one day ahead of schedule.

The notes were sold in two maturities: The $4.9 billion of securities maturing June 26, 2012, will pay an annualized yield of 0.40%; the $500 million in notes maturing May 24, 2012, will pay 0.38%.

The interest is exempt from state and federal income tax for California residents, so it’s equivalent to a higher taxable return, depending on an investor’s tax bracket.

When Treasurer Bill Lockyer launched the note sale on Tuesday he estimated that the final yield on the June notes would be 0.40% to 0.55%. Investor demand was strong enough to enable Lockyer to pay the lower rate.

With short-term interest rates in general scraping rock bottom, a 0.40% tax-free yield beats many of the alternatives for investors looking for a haven for their cash. One-year U.S. Treasury bills pay less than 0.10%.

Individual investors bought $3.55 billion of the notes, or almost two-thirds of the deal, Lockyer said. Institutional investors such as mutual funds bought the rest.

California and many other state and local governments issue so-called revenue anticipation notes, or RANs, at this time of year to bridge the gap between their cash needs and the arrival of tax revenue later in the fiscal year.

Lockyer had planned to sell RANs in August. But fearing that the debate in Washington over the federal debt ceiling might rile financial markets, he chose to borrow first from major banks to have the money in hand, and sell notes later to retire the bank loan.

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-- Tom Petruno