Bloomberg News

California Raises Yields on $2 Billion Refunding Bond Offering

March 01, 2012

California (STOCA1) raised yields on $2 billion of general-obligation bonds it sold today as it wrapped up its first such offering since October.

The sale represents about a quarter of municipal issuance this week and helped push up interest rates in the $3.7 trillion market for local-government debt, said Jason Hannon, a trader at New York-based Arbor Research & Trading Inc.

The state sold a 10-year part at a 2.78 percent yield, up from the 2.69 percent offered yesterday, according to data compiled by Bloomberg. The yield is still about 0.9 percentage point lower than in the October sale.

Orders from individual buyers accounted for almost half the tax-exempt offer, according to Tom Dresslar, a spokesman for Treasurer Bill Lockyer. The most populous and most indebted state took $930.7 million in orders from individuals, or 47 percent, Dresslar said. The refunding will save the state $250 million in debt-service payments, he said.

“It’s rewarding to ease taxpayers’ burden in these tough economic and fiscal times,” Lockyer said in a statement today. “With the state still fighting to keep its budget in the black, every bit of savings helps.”

For debt due in 2038, the longest maturity, the yield rose to 4.13 percent from 4.08 percent yesterday.

Lower Than October

The state is still paying lower yields and a smaller yield spread over benchmark debt than in October. Then, a 10-year portion priced to yield 3.7 percent, according to data compiled by Bloomberg.

The California sale pushed up yields on top-rated municipal debt maturing in 10 years by five basis points to 1.9 percent, said Hannon at Arbor Research. Rates on 30-year bonds rose four basis points to 3.27 percent, he said. A basis point is 0.01 percentage point.

Governor Jerry Brown curbed borrowing last year to help shrink deficits. The state offered $3.3 billion in debt in 2011, the least in four years. That crimped the supply of California state and local bonds, which returned more than the full muni market in each of the past three years.

Demand may increase for California tax-exempt bonds if voters approve Brown’s proposed November ballot measure seeking to raise tax rates on personal incomes higher than $250,000 to help close a $9.2 billion deficit.

Narrower Spread

The bonds maturing in 10 years yield about 87 basis points more than top-rated debt of the same maturity, according to BVAL data. The difference is down from 128 basis points on similar maturities in October.

J.P. Morgan (JPM) Securities LLC, Barclays Capital and Wells Fargo (WFC) Securities managed the sale.

The outlook on California’s credit was revised to positive from stable by Standard & Poor’s on Feb. 14. S&P has an A-rating on $73.4 billion of general-obligation debt, its fourth-lowest investment grade and the worst of any state. Moody’s Investors Service rates the state A1, the second-lowest after Illinois.

California state and local debt returned 14.8 percent last year, according to a Bank of America Merrill Lynch index tracking prices and interest income. That’s the most since 2009 and more than the 11.2 percent return for the broader market, 9.8 percent for Treasuries and 7.5 percent for top-grade corporate debt.

In January, California issues returned 3.3 percent, more than the muni market, Treasuries and corporate securities, the indexes show.

A 10-year California general-obligation bond sold in October traded on Feb. 6 with an average yield of 2.67 percent, or 90 basis points more than the index of top-rated debt.

To contact the reporters on this story: Michael B. Marois in Sacramento at; James Nash in Sacramento at

To contact the editor responsible for this story: Mark Tannenbaum at

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