California Municipal Bond Sale Draws Heavy Investor Interest
Investors flocked on Wednesday to California’s last general-obligation bond sale of the year, letting the state borrow again at interest rates lower than those that other U.S. sellers of tax-exempt debt must pay.
The strong appetite for California’s municipal bonds mirrors the demand for U.S. Treasury securities: Yields on both types of bonds have tumbled this year as investors have rushed to lock in returns amid stock market turmoil and a weakening economy.
That has produced hefty “total” returns on muni bond mutual funds--that is, interest earned, plus the appreciation in share value as older bonds at higher yields have increased in value.
California on Wednesday sold $648 million in general obligation bonds of varying maturities.
Most of the money from the sale--$455 million--will help finance construction of classrooms across the state. A smaller portion will refinance debt carrying higher interest rates.
The 10-year bond in Wednesday’s offering yielded 4.5% annualized. Because that interest is tax-free, it is equivalent to 8.21% on a taxable bond for a California resident in the highest federal and state income tax brackets.
By contrast, 10-year Treasury notes yield 5.53%.
Five-year California bonds in Wednesday’s sale yielded 4.2%.
California, which may generate a budget surplus of about $7 billion for the second straight year, received credit rating upgrades in September.
Still, the state’s general obligation bonds yield less than many muni bonds that have higher ratings. That’s a reflection of California investors’ hunger for tax-free bonds this year.
California yields are “in a world of their own, and that’s true throughout the state of California” for local governments as well, said Austin Tobin, head of Delphis Hanover Corp., a financial advisory company in Southbury, Conn., that analyzes bond sales.
California has sold about $3.8 billion in general-obligation bonds this year, according to Bloomberg News.
Growing concern about stock losses and the possibility that corporate debt will continue to face more downgrades than upgrades by rating companies in a slowing economy have helped increase investor demand for muni bonds and other government-backed debt this year.
Tax-exempt muni bonds on average have produced total returns of 8.5% so far in 2000, according to the Lehman Bros. municipal bond index.
Bonds sold by California and its cities, counties and public authorities have performed even better, providing an average total return of 9.9%, according to the Lehman index.
Many California-only muni bond mutual funds have posted total returns exceeding 10% this year.
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Muni Bond Funds Rebound
California municipal bond mutual funds endured a rough ride in 1999, as bonds in general plunged in value amid rising market interest rates. But this year most muni funds have recorded strong “total” returns-that is, interest earnings, plus appreciation of share value as market yields have fallen. Total returns for a sampling of funds:
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Total return: Fund 1999 YTD SAFECO Calif. Tax-Free -9.2% +14.1% Smith Barney Calif. Muni A -5.8% +11.8 Vanguard Calif. Insured Muni Long-Term -3.1% +11.5 Liberty Calif. Tax-Exempt A -4.3% +11.1 Dreyfus Calif. Tax-Exempt -4.4% +10.9 Wells Fargo Calif. Tax-Free A -3.7% +10.2 Franklin Calif. Tax-Free A -4.4% +10.1 Alliance Capital Muni Calif. A -3.2% +9.9 Oppenheimer Calif. Muni A -6.5% +9.4 John Hancock Calif. Tax-Free A -2.9% +8.0
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Source: Morningstar Inc., Times research
