California Yields Fall Amid Reserve Redraft: Muni Credit

California’s borrowing costs have fallen to the lowest level in three months, with Governor Jerry Brown calling a special legislative session to alter plans for a budget reserve just as the most indebted U.S. state offers $750 million of bonds.

Investors in California bonds demand 34 basis points, or 0.34 percentage point, more than top-rated debt for 10-year securities, according to data compiled by Bloomberg. That’s down from 53 basis points on Jan. 16. The lower yield means it costs taxpayers less to borrow, though the spread is higher than what investors earn from triple-A rated states such as Virginia.

“Investors are getting the yields they would get on an A rated bond even though they are buying what is in essence a triple-A rated bond,” said Bud Byrnes, president and chief executive officer of RH Investment Corp., a municipal-bond trading company in Encino, California.

Brown, a 76-year-old Democrat, has curbed borrowing as demand for the state’s tax-exempt bonds grew following an income-tax increase on residents earning $250,000 or more. The rate reaches 13.3 percent on those making $1 million or more, the most of any state. He’s endorsed a constitutional amendment to salt away volatile capital gains tax revenue. Credit rating companies have criticized the state’s dependence on capital gains because it’s unpredictable.

Lower Availability

Treasurer Bill Lockyer will auction $575 million of various-purpose general obligations and $175 million of taxable debt tomorrow. The sale comes as benchmark yields in the $3.7 trillion municipal market are at their lowest since June. The yield on 10-year bonds fell to 2.393 percent on April 17.

California has sold just $1.8 billion in securities since January. In the same period a year earlier, the state sold $5 billion of general-obligations, or more than half of its offerings for 2013.

California issued $8.5 billion of tax-exempt debt last year, up from $5.8 billion the previous year and $4.5 billion in 2011, according to state figures.

This week’s sale will be the third-largest competitive auction since Lockyer sold $1.76 billion in debt in February 2007. He auctioned $764 million last August. The Golden State has relied on privately negotiated deals for almost 80 percent of its general-obligation sales in the last decade, according to data compiled by Bloomberg.

Debt Yield

“Unlike negotiated deals, a lot of this will be stocked,” said Byrnes, whose firm will be part of a group bidding for the bonds. “Maybe 40 or even 50 percent of the deal will be people buying Cal so they can sell afterwards. They will be buying product so that they can put it on the shelf to offer to retail buyers.”

When California sold $1.8 billion of bonds in March, the state priced debt maturing in 10 years to yield 3.04 percent, or 0.47 percentage point more than benchmark debt with a similar maturity. Bonds maturing in 29 years were sold with a yield of 4.52 percent, or 66 basis points above benchmark debt with a similar maturity, data compiled by Bloomberg show.

Standard & Poor’s raised California’s rating in January 2013 to A, the company’s sixth-highest, with a positive outlook. It was the state’s first upgrade by S&P since 2006.

California still has the second-lowest S&P rating among U.S. states, ahead of only Illinois. In August, Fitch Ratings boosted the state’s grade to A, also sixth-highest. Moody’s Investors Service rates the bonds A1, fifth-highest.

“We like the concept, from a credit standpoint, of putting aside revenue in strong years and having them to draw upon in down years,” Gabriel Petek, an S&P analyst in San Francisco said April 16 in a telephone interview. “We view it as a good thing to strive for.”

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