Advertisement

California Bonds Attract Small Investors

Share
Times Staff Writer

California’s sale of $2 billion in general obligation bonds drew strong demand from individual investors Tuesday and Wednesday as the state’s financial woes failed to deter people hungry for above-average yields.

The tax-free bond offering attracted $876 million in so-called retail orders, or those from small investors, according to bond underwriter Goldman, Sachs & Co. Big investors, such as mutual funds, will place orders today.

At the last state bond sale, in October, small investors sought to buy $365 million of securities.

Advertisement

Voter-authorized general obligation bonds are used to fund school construction, new parks and other infrastructure projects statewide. The securities offered this week aren’t related to the $15 billion in IOUs that voters will be asked to approve on March 2 as part of Gov. Arnold Schwarzenegger’s plan to plug the state’s budget deficit.

Still, investors’ eagerness to extend credit to the state may be viewed as a sign of faith in California’s long-term fiscal health, some bond market pros said.

“It’s validation that the state is not about to go bankrupt,” said Stephen Kelleher, head of municipal bond underwriting at brokerage firm RBC Dain Rauscher in San Francisco.

Retail demand for the general obligation bonds has been “gangbusters,” said Dean Gestal, head of bond trading at underwriting firm Stone & Youngberg in San Francisco, which is co-managing the deal with Goldman Sachs.

Demand from bigger investors also is expected to be strong. “They are lined up here,” Gestal said.

The key attraction of the bonds: Their yields -- the annualized interest rates -- are well above what investors can earn on competing securities, adjusted for the tax exemption.

Advertisement

For example, the California bonds maturing in five years were offered for sale at a yield of 2.94%. That interest is exempt from state and federal income taxes for California investors. For someone in a combined federal and state marginal tax bracket of about 30%, a 2.94% tax-free yield is the same as earning 4.2% on a fully taxable bond.

By contrast, the yield on a five-year U.S. Treasury note, which is subject to federal tax, was 3.02% as of Wednesday.

California has the worst credit rating among the states and so pays more than others to borrow. But interest rates overall remain low by historical standards. The Federal Reserve is holding its benchmark short-term rate at a 40-year low of 1%, and longer-term bond yields in general have fallen this year.

What’s more, there has been a relative shortage of new municipal bond offerings in California this year, said David Blair, a senior bond analyst at Nuveen Asset Management in Irvine

“There’s a lack of supply and pent-up demand,” he said.

Given the surge in small-investor orders, many analysts said they expected the state to boost the size of the general obligation bond sale today to accommodate big investors.

By selling more bonds, the state could fund more infrastructure projects. But Juan Fernandez, chief of the public finance unit in the state treasurer’s office, declined to say whether the offering would be increased.

Advertisement

As is typical in general obligation bond sales, the securities are being sold in maturities ranging from one year to 30 years.

Advertisement