Yields trimmed in California bond sale as buyers step up

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California had great timing with its sale of $1.75 billion in general-obligation bonds this week. But that’s translating into lower interest returns than the buyers of the bonds might have hoped.

The state’s bond deal came to market amid a resurging investor appetite nationwide for the relatively high tax-free yields on municipal securities.

That appetite was evident in the orders that individual investors placed for the California bonds: State Treasurer Bill Lockyer’s office said it got nearly $900 million in retail orders Tuesday and Wednesday.

At the start of the order period, the state figured it would be paying an annualized yield of 5.14% on the 30-year bonds in the deal. Instead, the final yield was 4.96% on that issue. That yield is exempt from federal and state income tax.

The final yields were set today, after institutional investors placed their orders. If retail investors didn’t like the final yields they were allowed to rescind their orders, and some did. That cut the final retail order tally to about $800 million, a Lockyer spokesman said.

Credit-market turmoil in February and March left many investors wary of muni bonds. That also produced spectacular bargains: When the state sold $1.75 billion in bonds in early March, it had to pay 5.4% on the 30-year issue in that deal.

Individual investors, smartly, were all over that bond sale. They put in orders for nearly 90% of the total issued.

So this time around, as yields have declined, individuals weren’t quite as enthused. But getting retail investors to take almost half the bonds still is a big achievement compared with what the state was used to getting in recent years.

The state’s bond offerings raise money for voter-approved infrastructure projects and to pay off higher-yielding debt. The securities are sold in maturities of one to 30 years. The next California general-obligation bond sale is likely to be in June.

A sampling of the final tax-free yields in this week’s deal: 3.33% on the five-year bond, 4.15% on the 10-year, 4.63% on the 17-year and 4.86% on the 25-year.