California Raises Yield to 3.57% on 20-Year Bond Offering

California raised yields on some longer maturities and completed its $2.1 billion general- obligation sale, the state’s first debt offer since it got an upgrade from Standard & Poor’s in January.

California sale came in the worst week for state and local debt this year. Yields on benchmark 10-year munis have risen 0.23 percentage point this week to 2.06 percent, close to the highest since April, data compiled by Bloomberg show. Bonds are losing appeal as the Dow Jones Industrial Average has set a record high amid signs of a strengthening U.S. economy.

In California’s sale, 10-year bonds were offered at a yield of 2.56 percent, up from 2.54 percent yesterday, according to data compiled by Bloomberg. Yields on longer maturities rose even more. Twenty-year securities were offered with a 3.57 percent yield, up from 3.39 percent.

“All factors considered, including investor sentiment that has become less accommodating to issuers in the last couple of weeks, we’re very pleased with the results,” said Tom Dresslar, a spokesman for Treasurer Bill Lockyer. “We came into a tough market with a large amount of new supply and obtained a good result for taxpayers.”

Individual investors ordered $795.4 million of the $888.9 million in tax-exempt debt made available to them. Those orders accounted for 37 percent of the total $2.1 billion. The state will use $1.1 billion of the proceeds to refinance existing debt and lower borrowing costs.

Investors’ Thirst

The yield offered on the 10-year segment is about 0.48 percentage point above a Bloomberg Valuation index of AAA munis and about 0.77 percentage point on the 20-year bonds.

The most-populous U.S. state earned its first upgrade from S&P since 2006 after Governor Jerry Brown curbed pension costs, won voter support for a tax boost and proposed a budget for next fiscal year that projects a surplus. New York-based S&P raised California to A, its sixth-highest rank, lifting it out of a tie with Illinois as the lowest-rated state.

Lockyer also sold $100 million of taxable bonds yesterday maturing in 2015 to yield 0.64 percent, or 38 basis points more than Treasuries; and $264 million of three-year taxable securities priced to yield 0.93 percent, a spread of 53 basis points, Dresslar said. A basis point is 0.01 percentage point.

Separately, Lockyer remarketed $228 million of taxable Build America (BAB) Bonds. The Build America program, which expired in 2010, gave states and cities a federal subsidy on interest as part of an economic stimulus plan. California and its local governments sold more than $39 billion of the debt.

The relative borrowing cost for issuers in the state has been cut in half since Brown, a 74-year-old Democrat, took office in 2011.

The extra yield over top-rated municipal bonds that investors demand to own 10-year debt of the state and its localities climbed 0.57 percentage point today. It was as low as 52 basis points March 11, the narrowest since November 2008, data compiled by Bloomberg show.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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