State’s Bond Sale Is Strong
California’s borrowing costs, the highest among states, narrowed against top-rated debt in a $500-million bond sale Thursday, a sign investors see less risk after Gov. Arnold Schwarzenegger averted a cash shortage in June.
Schwarzenegger persuaded voters in March to let the state borrow as much as $15 billion to help pay off $14 billion of debt maturing in June. Since then, the state’s borrowing costs compared with those of top-rated issuers have narrowed. The state plans to borrow $2.7 billion in the next three months.
“We believe that the economy in California is gradually on an improving track, and that has improved their budgetary situation to some extent,” said John Miller, a fund manager at Nuveen Investments, which oversees $54 billion of bonds. “But the prices of California municipal bonds have reflected those improvements and the credit spreads on their municipal bonds have tightened considerably, so it represents less of an investment opportunity than it did six or eight months ago.”
California’s 20-year bonds sold Thursday yielded 4.83%, 0.30 of a percentage point more than what municipal borrowers with the highest credit rating would pay, according to a Municipal Market Data index. When California sold 20-year bonds in April, the state paid 5.23%, about 0.49 of a percentage point more than AAA-ranked sellers.
Thursday’s sale of general obligation bonds comes after Fitch Ratings on Tuesday raised its rating on California bonds two levels to A-minus from BBB. Standard & Poor’s raised the state’s credit rating Aug. 24 to A from BBB. Moody’s Investors Service in May raised the state to A3 from Baa1, the third lowest of 10 investment grades.
“Coming on the heels of our third credit upgrade in five months, this is another clear demonstration of the growing confidence that the financial markets have in California,” Schwarzenegger spokesman H.D. Palmer said. “Because of the fiscal turnaround that we’ve begun, investors looking at California are now seeing less risk and more opportunity, and that’s translating into lower costs for the state.”
