Plenty of Takers for State’s Short-Term Notes
California attracted far more bids than needed for a record $7.5-billion offering of short-term notes Tuesday, but still paid higher yields than some other states, amid investor wariness over budget woes.
The notes, which mature between October and January, were priced to yield between 1.7% and 1.8% annualized, depending on the maturity. The interest is free of federal and California income taxes, so the true return to investors is higher.
Concern among investors about the state’s $23.6-billion deficit for fiscal 2003 forced California to pay more than it otherwise would compared with other borrowers. For example, Idaho sold $350 million of one-year notes Monday at a yield of 1.63%.
Even so, the California offering was oversubscribed because “people are looking for short-term alternatives to pick up a little extra yield,” said David Kotok, chief investment officer of Cumberland Advisors Inc. in Vineland, N.J., which manages about $500 million.
Many investors don’t want to tie up money for more than a few months “because there’s a fear interest rates will rise” and hurt the value of existing debt, he said.
California received “a terrific show of interest” from investors, as 12 securities firms submitted $22.4 billion worth of bids for the notes, state Controller Kathleen Connell said. Morgan Stanley submitted the winning bid for $4.1 billion of California’s sale. The remainder was distributed among other securities firms.
The state, which typically sells so-called revenue-anticipation notes to manage cash flow, isn’t allowed to sell such securities until a budget is approved for the new fiscal year beginning July 1. State lawmakers are still debating ways to close the budget gap.
In response, the state opted to sell a form of short-term notes known as warrants to make sure it can pay its bills from July to September. The warrants, under California law, are similar to revenue-anticipation notes except that they can be repaid in a future fiscal year. Revenue-anticipation notes must be repaid in the fiscal year they are sold.
