With yields up, California muni bond sale sees strong demand

The steep rebound in California municipal bond yields since the start of the month is bringing individual investors back to the market in a big way.

The state?s latest bond sale -- an offering of $3.5 billion in tax-free "economic recovery bonds" -- attracted $1.7 billion in orders from individual buyers by midday today, according to Treasurer Bill Lockyer?s office.

That?s far better than the state fared earlier this month, when it offered $1.3 billion of tax-free general-obligation bonds for sale and got just $428 million in individual-investor orders over two days.

The difference this time: significantly higher yields. For example, the preliminary annualized yield offered on the 13-year bond in this week?s deal is 5%, compared with the 4.47% the state paid on a 13-year bond in the sale Oct. 8.

Interest on the bonds is exempt from state and federal income tax for California residents.

"At these [yields] retail investors are back in," said Parker Colvin, a bond trader at Stone & Youngberg in San Francisco.

The so-called economic recovery bonds for sale this week will refinance previously issued ERBs. That was the debt that voters authorized in 2004 to bail the state out of that year?s budget mess.

The ERBs are backed not only by the state?s full faith and credit, like all general-obligation bonds, but also by a dedicated portion of sales tax revenue. Because of the specific tax backing, the bonds have slightly higher credit ratings than the state?s general-obligation bond ratings.

Standard & Poor?s, for example, rates the new ERBs "A-plus," compared with its "A" rating on the state?s general-obligation debt.

The state?s brokerage underwriters are taking orders for the bonds from individual investors today and Wednesday, and will take institutional orders Thursday. That?s when the final yields will be set.

Based on the demand so far, the state could end up paying lower yields than the preliminary rates it has quoted to investors. I?m hearing that the bonds maturing between 2013 and 2019 already are sold out. That would leave just the 13-year issue. [UPDATE at 4:30 p.m.: The state said it still had bonds to sell in the 2019 and 2022 maturities.]

California will be back in the market next week with a sale of $1.5 billion in general-obligation bonds to finance infrastructure projects, but those bonds are expected to be sold only in long-term maturities. The shortest-term bond in that deal may be for 23 years.

Typically, individual investors are reluctant to buy bonds maturing that far out. Those bonds usually are purchased by big investors such as mutual funds.

Here are the preliminary tax-free yields that were quoted today on the ERB deal (again, note that the final yields could be lower):

Maturity Yield

2013.........2.55%

2014.........3.08%

2015.........3.59%

2016.........4.00%

2017.........4.30%

2019.........4.65%

2022.........5.00%

-- Tom Petruno