Demand very strong for state bonds
Lured by the highest yields in years, small investors put in a record volume of orders Monday for the state of California’s sale of $1.75 billion in general obligation bonds.
Individual investors placed 4,157 orders for a total of $1.2 billion of the bonds, or nearly 70% of the total, said Paul Rosenstiel, head of public finance for Treasurer Bill Lockyer in Sacramento.
Because of robust demand the state said it would cut short the normal two-day retail order period. Instead, both retail and institutional orders will be taken from 7 a.m. to 9 a.m. today to complete the sale.
Small investors’ orders today will get priority for bonds maturing in 2016 and 2017, but institutions will have priority for bonds maturing in 2026, 2027 and 2038, Rosenstiel said.
Demand already exceeded supply for bonds maturing in 2021, 2022 and 2023, he said.
The state’s debt offerings normally include bonds with maturities from one to 30 years.
Interest rates on muni bonds have soared in recent weeks as the worsening credit crunch and worries about the economy have caused skittish investors to pull back from all bonds except U.S. Treasuries.
But by late last week many market pros were advising clients to jump into munis, saying the tax-free yields they offered presented a rare opportunity.
The state said the preliminary yield on its five-year bonds was 3.85%; on 20-year bonds the yield was 5.55%. Final yields will be set today.
For California residents, interest on the bonds is exempt from federal and state income tax. For someone in the 32% combined federal and state tax bracket, a 3.85% tax-free yield is equivalent to earning 5.66% on a taxable bond. By contrast, five-year Treasuries were paying 2.52% on Monday.
A 5.55% tax-free yield is equivalent to earning nearly 8.2% on a taxable bond.
The state’s sale is one of its periodic bond offerings to finance voter-approved infrastructure improvements such as new schools, libraries and clean-water projects.
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