California will benefit from “pent-up demand” for its debt in the $2 billion sale of general-obligation securities it plans for March 1, said Robert Miller, a senior portfolio manager at Wells Capital Management.
The state’s debt is rallying the most in three years after Governor Jerry Brown and Treasurer Bill Lockyer curbed borrowing to help shrink deficits totaling more than $35 billion since Brown took office in January 2011. The state borrowed $3.3 billion in 2011, the least in four years, and hasn’t sold tax-exempt debt since October.
“They hardly issued anything last year,” Miller said at a portfolio managers’ conference organized by Bloomberg Link in New York. “There’s a lot of pent-up demand.”
California is Standard & Poor’s lowest-rated state, with a grade of A-, the seventh-highest. Its credit outlook, negative as recently as eight months ago, was raised to positive from stable this week by S&P. The state is positioned for a higher grade if revenue comes closer to projections in Brown’s budget, the ratings company said.
Ten-year general-obligation bonds from California state and local issuers yielded 2.79 percent yesterday, or 84 basis points more than AAA municipal debt, according to data compiled by Bloomberg. It’s the smallest difference since 2008. A basis point is 0.01 percentage point.
May Narrow More
The yield gap between the state’s debt and top-rated bonds may narrow to as little as 75 basis points, said Miller at Wells, which had about $330 billion in assets as of Dec. 31.
The proceeds from the March sale will go toward refinancing debt. California will also sell as much as $1 billion of cash-flow notes Feb. 22.
The state is still struggling to cut expenses, Jamie Pagliocco, a municipal portfolio manager at Boston-based Fidelity Investments, said at the conference.
The state collected $528 million less in taxes in January than Brown estimated in his latest budget, Controller John Chiang said Feb. 10.
Eaton Vance Management is trying to sell its California general-obligation debt before the sale on the view that they will get cheaper, said Thomas Metzold, co-director of municipal investments at the company.
Eaton Vance had about $185 billion in assets under management as of Dec. 31.