High Yields Lure Buyers to State Bonds : Securities: Prudential edges out the usual brokers in a deal marked by heavy demand from individual investors.

California successfully sold $400 million in general-obligation bonds Tuesday in a deal apparently marked by heavy demand from individual investors hungry for the tax-free yields as high as 6.35%.

The bonds were sold to a broker syndicate led by Prudential Securities, which assumes responsibility for placing them with investors.

Prudential’s winning bid for the deal was a surprise, because California general-obligation issues have traditionally been handled by Goldman Sachs, Bank of America or Merrill Lynch.

Craig Walker, managing director in Prudential’s western region public finance group, said Prudential bid aggressively for the bonds because “our retail (customer) system is very hungry for product.”

Market interest rates have jumped sharply this year, as the economy’s growth has fanned inflation fears. While the continuing rise in bond yields has caused many big investors to step back, individuals have in recent weeks become major buyers, particularly of tax-free bonds, brokerages say.

In Tuesday’s California issue, the annualized yield on the 30-year bonds offered was 6.35%, up from 5.24% on 30-year bonds sold by the state in September. For Californians in the 42% combined federal and state tax bracket (taxable income of $140,000 to $212,380 for a couple filing a joint return), a 6.35% tax-free yield is equivalent to a 10.9% taxable yield.

The state’s bonds were offered in maturities ranging from one year to 30 years. While yields on shorter-term issues were far lower than those on the longest-term bonds, they were still up significantly from last fall. For example, the five-year bonds sold Tuesday yielded 4.95%, compared to 3.80% on similar bonds sold in September.

Prudential’s Walker said about $100 million of the offering was still in dealers’ hands at day’s end, awaiting public buyers.

The bonds, which will finance a variety of public construction projects, are rated AA by two of the three major credit rating agencies and A+ by the third.

Some large investors have shied away from California general-obligation bonds because of fears that the rating agencies will downgrade the bonds this summer if the state can’t close its widening budget gap.