FINANCIAL MARKETS : Quiet Reaction to Downgrade

California state and municipal bonds showed little price reaction Friday to news that the state’s credit rating was downgraded. But analysts expect that already weak, lower-quality California bonds will continue to slide in value in coming months, while the highest-quality bonds will gain.

Credit-rating agency Standard & Poor’s clipped the state’s rating on its general obligation bonds to AA from AAA for the first time since 1986. S&P; cited the state’s rising economic woes.

Walt Beveridge, muni bond manager at Benham Capital Management in Mountain View, said yields on some long-term California bonds inched up 0.05 points on the news. A 20-year California general obligation bond now yields about 6.65%.

Yields on muni bonds nationwide have been rising since mid-November on growing worries about the fiscal health of states and municipalities. Investors demand higher yields when they perceive higher risk in a bond.

Many big bond investors had anticipated that California’s rating would be downgraded, analysts said, so they didn’t expect a major reaction to the S&P; cut.

Nonetheless, as a commentary on the weak California economy, “I think it is a significant event,” said Peter Coffin, who manages the MFS Managed California Muni Bond Trust mutual fund in Boston.

His $155-million fund now is concentrated in bonds that are backed by revenues from necessary public services, such as water and power, Coffin said. He’s avoiding so-called Mello-Roos bonds and other issues that were used to help finance real estate projects.

Coffin and Beveridge both foresee Mello-Roos and other riskier California issues falling further in value in coming months, as investor fears about the state economy grow. More investors are likely to gravitate toward the bonds perceived to be the safest, such as water bonds, the analysts say.