Individual investors’ orders stay light in California bond sale

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Demand from individual investors remained on the light side Tuesday as California wrapped up the second day of a large bond offering to fund infrastructure projects.

Treasurer Bill Lockyer said the state’s brokerage network took in an additional $137 million in orders from individuals for the offering of $1.8 billion in tax-free muni bonds. On Monday the state got $250 million in orders. The two-day total of $387 million was about 21.5% of the total deal.

That was significantly less than the $655 million that individual investors ordered at the state’s last bond offering, on Sept. 20. That total was almost 28% of the $2.37-billion deal.

Lockyer got a better response to an offering of $200 million in shorter-term taxable bonds Tuesday. Individual investors ordered about 43% of those issues.

The state will complete the bond sale Wednesday, when institutional investors such as mutual funds will bid for the remaining securities and final yields on the bonds will be set.

The tax-free bonds -- the interest paid is exempt from state and federal income tax for California residents -- got a lukewarm reception from individual investors even though the state was offering higher interest rates than at the September sale.

As bond yields in general have rebounded over the last month, the state was offering a preliminary yield of 2.10% on the five-year bonds in its latest sale, up from 1.61% in the September deal. The 10-year bonds in this sale were offered at a preliminary yield of 3.51%, up from 3.17% at the last sale.

The bonds, known as general obligation issues, are being sold in maturities of three to 30 years. The tax exemption means the yields on the bonds can be worth substantially more than similar fully taxable yields, depending on an investor’s tax bracket.

California always prefers to get substantial orders from individual investors in debt deals. That lessens the chance that institutional investors will be able to use their clout to demand higher yields when they bid for whatever’s left. (Individual investors get whatever the final yields turn out to be.)

Some muni bond market analysts say individual investors are unhappy with the relatively low interest rates on tax-free bonds, even though yields have risen over the last few weeks.

‘Given overall market conditions we’re satisfied with the outcome,’ said Tom Dresslar, a spokesman for Lockyer in Sacramento.

Proceeds from the securities will finance a backlog of voter-approved infrastructure projects.

This week’s sale will be California’s last general-obligation bond offering of 2011.

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-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno