California muni bond yields jump as budget crisis sinks in
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California’s fiscal mess has begun to rattle municipal bond investors.
Market yields on the state’s outstanding general obligation bonds have jumped in the last week, reflecting falling prices for the securities as buyers have backed away.
Traders were quoting annualized tax-free yields of about 4.7% on 10-year California general obligation issues on Tuesday, up from 4.4% early last week.
The yield on five-year California bonds was around 3.45% Tuesday, up from 3.04% a week ago, according to Bloomberg News data.
The muni market sell-off has been fueled in part by a jump in yields on U.S. Treasury securities, amid the federal government’s record borrowing binge. Rising Treasury yields can push up interest rates in general.
But the California market has suffered a sharper pullback than the national muni market.
Joe Lee, a senior vice president at muni bond dealer De La Rosa & Co. in Los Angeles, estimated that the rebound in yields on California bonds was about 75% driven by the state’s worsening fiscal picture and 25% by the upheaval in the Treasury market.
Even as the state’s woes deepened in April and early May, muni investors were largely unruffled, as I noted in this post.
The immensity of the state’s cash crunch may just have taken a while to sink in. Credit rating firm Fitch Ratings sharpened investors’ focus last week when it warned that it might cut California’s bond rating -- which already is the lowest of all the states.
Gov. Arnold Schwarzenegger, trying to push the Legislature to make massive budget cuts, gets points for being brutally honest but isn’t helping investors’ mood when he warns that, ‘Our wallet is empty, our bank is closed and our credit is dried up.’
Still, the bond market doesn’t believe that California actually would renege on its debts. If that were the case, bond yields would be dramatically higher than they are now.
But as investors perceive more risk in lending to California than, say, to Texas, they naturally raise the Golden State’s cost of money. That’s the penalty for being profligate.
Once a new budget is in place, the big test for the state will be the $10 billion (or so) in short-term borrowing it must undertake in July. The talk in the muni market has been that California will have to pay an annualized tax-free rate of 5% or more for that money, which is expected to consist of notes maturing in one to two years.
To put that penalty rate in perspective, Los Angeles County on Thursday will issue $1.1 billion in one-year notes at an expected yield of just 0.5%.
-- Tom Petruno