California suffered a painful snub by investors Thursday, as the state?s attempt to sell $4.5 billion in longer-term general obligation bonds failed to attract enough demand to raise the full amount.
After boosting interest rates on a chunk of the debt, the state reduced the total size of the deal by 8%, to $4.14 billion, according to Treasurer Bill Lockyer?s office.
The debt, split among taxable and tax-free bonds, will finance voter-approved infrastructure projects.
Municipal bond analysts and investors said California was, in part, a victim of circumstance: The bond market overall -- including muni, corporate and U.S. government issues -- finally hit a wall last week after months of ravenous investor and trader demand that had pushed yields sharply lower.
Depressed yields finally led to a buyer?s strike, which quickly drove "momentum" traders out of the muni market, analysts said.
Suddenly, "People are punting bonds," said Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn.
On Thursday, even the U.S. Treasury market suffered a bout of indigestion as demand at the Treasury?s sale of $12 billion in new 30-year bonds was weaker than expected. The yield on existing 30-year T-bonds rose to 4.09% from 3.99% on Wednesday.
With investors insisting on higher yields on bonds in general before they?d buy, California was bound to be squeezed, analysts said. That also gave some investors an excuse to focus on the state?s still-troubled fiscal situation, which has left California with the lowest credit rating in the Union.
Tom Dresslar, a spokesman for Lockyer, acknowledged that the state?s weak credit rating "didn?t help" the bond sale results.
What?s more, institutional investors knew they could push the state for higher yields after bond orders from individual investors came in well below expectations.
Lockyer invited individuals to put in orders Tuesday and Wednesday. But their interest was muted: Of the $1.3 billion in tax-free bonds offered for sale, individuals ordered just 33%, or $428 million.
By contrast, when California offered $4 billion in tax-free bonds for sale in March, individuals quickly grabbed 75% of them.
The lure in March was that interest rates were much higher. The state paid an annualized 5.85% yield on the 20-year tax-free bond sold in March, for example. In this week?s offering, individual investors were offered a preliminary yield of 4.63% on the 20-year tax-free issue.
But the relative dearth of demand this time around forced the state to raise final yields across the board. The 20-year tax-free bond will pay 5%. The seven-year issue in the deal will pay 3.37%, up from the 3.1% initially offered.
The state was able to sell all $1.3 billion of tax-free debt it had planned. It also sold $1.75 billion in 30-year federally subsidized Build America Bonds at a taxable yield of 7.23%. (After the subsidy, the net rate paid by the state will be 4.70%.)
The state cut back on two other taxable issues it had hoped to sell, abandoning a 15-year issue entirely and reducing a four-year issue to $140 million from $250 million.
Although California had to shell out higher interest rates than it had hoped -- a bill to be footed by taxpayers -- Dresslar noted that rates still were well below what the state paid in the spring bond sale.
Here are the final yields that individual and institutional investors will be paid on the tax-free bonds (interest is exempt from state and federal income tax):
Maturity Yield
2015.........2.95%
2016.........3.37%
2017.........3.70%
2018.........3.93%
2020.........4.28%
2021.........4.39%
2022.........4.47%
2025.........4.69%
2029.........5.00%
-- Tom Petruno
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