State will end bond sale early, amid strong demand

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Lured by good, if not great, tax-free interest rates, individual investors today snapped up nearly half of California’s offering of $1.75 billion in municipal bonds.

Treasurer Bill Lockyer’s office said individuals, via brokerages, had put in orders for $824 million of the bonds as of 5 p.m. PDT.

That wasn’t as strong as the demand at the last such sale, in early March, but it was enough to spur Lockyer to again cut short the planned two-day retail order period for the securities. The state said it would take orders from small investors only through noon Wednesday instead of through 5 p.m. And a spokesman for Lockyer said new retail orders would be limited to bonds maturing in 2022 (a 14-year issue) and 2038 (a 30-year issue).

The final yields for all of the bonds in the deal will be set on Thursday, when institutional investors bid.

The state’s sale is one of its periodic bond offerings to finance voter-approved infrastructure projects or pay off higher-cost debt. The bonds, sold in maturities of one to 30 years, are general-obligation issues, meaning they’re backed by the state’s full faith and credit. The interest they pay is exempt from federal and state income tax for California residents.

Although the tax-free yields on muni issues are almost always attractive to high-income folks, even the less-than-well-heeled have found the bonds appealing this year, particularly compared with low-yielding U.S. Treasury issues. The 30-year bond in the current state offering, for example, is expected to pay an annualized yield about 5.05%. By contrast, the yield on 30-year Treasury bonds is about 4.37%. And Treasury interest is subject to federal income tax (but not state tax).

But muni yields have come down since early-March, and that has made them less lucrative. The 30-year bond in the March deal yielded 5.4%. In the March sale individual investors put in orders for nearly 90% of the $1.75 billion in bonds offered.

For more background on the state’s sale and what has been happening in the muni bond market in recent months, see the links in this posting.