Investors turn out for California muni bond sale -- for a price

California wrapped up a sale of $3.5-billion in tax-free municipal bonds on Thursday, and was able to trim yields slightly from initial expectations as investors bid aggressively for the debt.

Still, taxpayers will foot significantly higher interest costs than they did on the state?s last general-obligation bond offering, earlier this month.

Muni bond yields nationwide tumbled from July through September. But yields got so low by late September that investors suddenly went on a buyer?s strike. As a spate of new bond offerings hit the market early in October the issuers were forced either to jack up yields or pare their deals.

California got caught in that market push-back on Oct. 8 as it tried to sell $4.5 billion in bonds, including $1.3 billion in tax-free issues. The state had to boost yields to move the bonds.

In this week?s sale -- a refinancing of the state?s so-called economic recovery bonds, first issued in 2004 to plug that year?s accumulated budget deficit -- Treasurer Bill Lockyer had to agree to even higher yields than the state paid on the Oct. 8 deal.

For example, the 13-year bond in this week?s deal will pay an annualized tax-free yield of 4.85%, compared with the 4.47% yield on the 13-year issue in the previous bond sale. Higher interest rates mean servicing the debt takes a bigger chunk of the state budget.

But it could have been worse: Lockyer said the healthy investor demand, particularly from individuals, allowed the state to trim yields from the initial estimates on Tuesday. The state had expected to pay as much as 5% on the 13-year bond, for instance.

The state got $2.49 billion in orders from individual investors for this week?s $3.5-billion sale. Institutional investors bought what individuals didn?t take. Interest earned on the bonds is exempt from state and federal income taxes for California residents.

The state will be back in the market next week with a sale of $1.5 billion in tax-free bonds to finance infrastructure projects. Those bonds are expected to be sold only in long-term maturities. The shortest-term bond in that deal may be for 23 years.

Here are the final tax-free annualized yields on this week?s $3.5-billion bond sale:

Maturity    Yield

2013............2.48%

2014............3.01%

2015............3.52%

2016............3.93%

2017............4.17%

2018............4.40%

2019............4.54%

2020............4.65%

2021............4.69%

2022............4.85%

-- Tom Petruno

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