State Paying Lower Yields on Bond Sale

California on Wednesday sold the municipal market’s second-largest bond issue this year, totaling $850 million. And thanks to investors’ ravenous appetite for tax-exempt muni bonds, the state paid lower yields than it otherwise might have, analysts said.

California’s general obligation bonds, rated AA, sold with interest rates lower than those on AAA bonds from other states.

A five-year maturity yielded 4.1%, compared with 4.44% for a generic five-year AAA state general obligation, according to Bloomberg Fair Value.

“It seemed as though it was appropriate to the California market, which is another way of saying” bond demand is very strong, said Tim Browse, who oversees $200 million of muni bonds in a Lord Abbett California Tax-Free fund.

Investors have little leeway on pricing even when asked to absorb a larger sale, Browse said.

A dearth of supply is one reason for the relatively lower yields on California bonds. Investors continue to clamor for California munis amid a 24% drop in statewide tax-exempt bond issuance during the first six months of 2000, compared with the year-earlier period.

Investors also are willing to accept lower yields because of expectations California’s economy will outperform the rest of the nation--making for high credit quality.

Bond rating companies Moody’s Investors Service and Standard & Poor’s noted that positive economic outlook when they raised their ratings on California’s bonds last week, including its $22 billion worth of general obligations.

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Muni Yields Keep Sliding

Investors’ hunger this year for tax-exempt municipal bonds has pushed yields down sharply amid a relative short supply of new bonds.

Yield on the Bond Buyer index of 40 municipal bonds, monthly closes and latest (yield to maturity)

Wednesday: 5.74%

Source: Bloomberg News