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California launches $1.8-billion muni bond offering

October 17, 2011 | 11:18 am

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California on Monday offered tax-free yields as high as 4.87% on long-term general obligation bonds, hoping to attract substantial demand from individual investors.

The state is trying to raise $1.8 billion in the bond sale, its second offering in less than a month. The proceeds will be used to finance a backlog of voter-approved infrastructure projects.

Treasurer Bill Lockyer set preliminary yields on the bonds at levels above what the state paid in the last sale -- reflecting the rebound in market interest rates in recent weeks as U.S. economic data have pointed to slow growth but not recession. Higher yields are good for investors but more costly for taxpayers.

The bonds are being sold in maturities of three to 30 years. The state is offering 2.10% on the five-year bonds, up from 1.61% in the September deal. Ten-year bonds are offered at 3.51%, up from 3.17% at the last sale; the 30-year issue is offered at 4.87%, up from 4.80%.

The interest on the bonds is exempt from state and federal income tax for California residents, so the returns can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

California still has the lowest credit rating of any state, reflecting the weak economy and the state’s history of budget struggles. The bonds are rated A1 by Moody’s Investors Service and A- by Standard & Poor’s. Those ratings are considered “upper medium grade.”

Individual investors can submit orders for the bonds Monday and Tuesday. Orders must be placed with brokers; the state doesn’t sell its bonds directly to investors.

Institutional investors will bid for the remaining bonds on Wednesday, which is when the final yields will be set. Individual investors who don’t like the final yields have the option of canceling their orders.

The bonds are sold in minimum blocks of $5,000. For more information on the sale, go to Lockyer’s website, buycaliforniabonds.

RELATED:

California plans $2-billion bond sale amid rising yields

California sells out $5.4-billion short-term note sale

California sells $2.4 billion in bonds as yields fall

Investing: Is the bond market at a crossroads?

-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

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