California Deficit Boosts Borrowing Costs

California’s $26-billion budget deficit, the biggest among U.S. states, is boosting its borrowing costs relative to benchmark rates.

The state’s sale Thursday of $2 billion in bonds drew yields of 4.99% for a bond that matures in 20 years, 0.48 of a percentage point more than top-rated municipal debt.

The premium has more than doubled since October, a sign that investors perceive more risk in how California will narrow the record deficit through mid-2004. Credit downgrades have left California tied with Louisiana and New York for the lowest ratings among states, according to Moody’s Investors Service.

California bond yields are “not compelling” given the risks, said George Strickland, who helps oversee $1.8 billion in municipal bonds at Thornburg Investment Management.

California hasn’t been in such budgetary straits since 1992, when it issued promissory notes to employees and suppliers. Banks cashed the IOUs and received a 5% yield.

Investment banks led by Merrill Lynch & Co. on Thursday lowered yields on some maturities for institutional buyers after a two-day order period for retail investors. The yield on the 20-year bond dropped to 4.99%, from 5.02% offered to retail investors.