California plans $2-billion bond sale amid rising yields

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California will sell $2 billion in bonds next week, and the state probably will have to pay significantly more to borrow than it did three weeks ago.

That may lure more yield-hungry individual investors to the securities.

Treasurer Bill Lockyer plans to offer $1.8 billion in tax-free bonds and $200 million in taxable issues to raise cash for voter-approved infrastructure projects. The general obligation bonds typically are sold in maturities ranging from one year to 30 years.

The state borrowed $2.4 billion via bonds on Sept. 20, its first sale of 2011. That turned out to be near the recent low point for muni bond yields, which had been falling for much of this year in tandem with the decline in yields on other types of bonds, including U.S. Treasury issues.

But the rush into Treasury bonds as a haven has ebbed since mid-September, as worries about Europe’s debt crisis have eased somewhat and as U.S. economic data have pointed to slow growth but not recession.

The result: Treasury bond yields have rebounded, pulling other interest rates up as well.

California sold five-year bonds at a tax-free yield of 1.61% in the Sept. 20 sale. Now the market yield on five-year California debt is about 2.08%, said Joe Lee, a muni trader at De La Rosa & Co. in Los Angeles. Ten-year California bonds are yielding around 3.5%, up from 3.17% at the Sept. 20 sale.

Chris Ihlefeld, who manages the Thornburg California Limited-Term Municipal bond fund in Santa Fe, N.M., said yields may have to rise further to get the deal done next week. The muni market “is very sensitive to an uptick in issuance,” he noted. The state still will be paying much less than it shelled out to borrow late in 2010, when muni bond yields were soaring on fears of widespread defaults by cash-strapped state and local governments in 2011. That default wave never came. (Remember Meredith Whitney?)

California paid a yield of 2.66% on five-year bonds in November 2010 and 4.23% on 10-year bonds.

Even at today’s lower yields, California bonds are attractive relative to other kinds of debt because the interest paid is exempt from state and federal taxes for California residents. The higher your tax bracket, the more appealing muni yields are -- assuming you don’t expect a dramatic surge soon in interest rates in general, or that President Obama will succeed with his proposal to limit the tax break on muni bonds for high-income investors.

For the California sale, the state will give preliminary yield estimates on Monday, and individual investors will be allowed to place orders with brokers that day and on Tuesday (the state doesn’t sell its bonds direct to investors). Institutional investors will place orders on Wednesday, which is when the yields on the bonds will be set.

Individual investors who don’t like the final yields have the option of canceling their orders.

The bonds are sold in minimum blocks of $5,000. For more information on the sale, go to Lockyer’s website, buycaliforniabonds.com.

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-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno