Brown Wins as California Gets Best Bonds Since ’94
California debt is poised to extend its biggest rally in at least 18 years as Governor Jerry Brown curbs borrowing and pushes for tax increases to plug budget deficits.
The extra yield over top-rated municipal bonds that investors demand to own 10-year securities of the most-populous U.S. state and its localities is set to fall for a fifth straight quarter. It’s the longest streak since 1994, data compiled by Bloomberg show. California issuers are on a pace to sell about a third less than in 2009, stoking demand for a $1.55 billion state general-obligation sale to start tomorrow.
At 0.75 percentage point, the interest-rate penalty California borrowers pay above AAA has dropped by a third since Brown, a 74-year-old Democrat, took office last year and began whittling down chronic deficits. The securities have also benefited as investors sought higher returns with tax-free yields close to a 45-year low.
“California did not fall into the fiscal sea,” said Chris Ryon, who helps manage $8.3 billion of munis, including a California fund, at Thornburg Investment Management in Santa Fe, New Mexico. “Jerry Brown looks like he is really trying to make some cuts and shore up things.”
Voters in November will decide on Brown’s ballot measure to temporarily raise sales taxes and income levies on higher earners, money he counted in his budget that closed a $16 billion deficit.
His Republican predecessor, Arnold Schwarzenegger, dealt with a cumulative $104 billion of deficits during his seven-year tenure. He presided over budget negotiations that extended as much as four months into the fiscal year, and in 2009, the state had to rely on IOUs for six weeks to pay its bills. Also in 2009, issuers in the state sold a record $67.6 billion of debt, data compiled by Bloomberg show.
Starting with marketing to individual investors tomorrow, Treasurer Bill Lockyer is scheduled to offer $1 billion of bonds for public-works projects and $550 million to refund debt. Lockyer plans to offer about $5.3 billion this year, about a quarter of the state’s sales in 2009.
“There’s definitely pent-up demand,” said Craig Brothers, a managing director in Los Angeles at Bel Air Investment Advisors, which has about $3.2 billion of assets.
In Lockyer’s April general-obligation sale, 10-year bonds were priced to yield 2.87 percent, or 0.72 percentage point more than a Bloomberg Fair Value index of top-rated munis. The spread over AAAs hadn’t been that small since December 2008.
Bonds of the world’s ninth-biggest economy have returned 6.6 percent in 2012, beating all but three states and the 5.7 percent gain for the broader $3.7 trillion muni market, according to Standard & Poor’s data.
“We are pleased with the performance of California bonds and with the market’s recognition of the substantial fiscal strides we have made,” said Lockyer’s spokesman, Tom Dresslar.
Brown signed a second straight on-time budget in June, the first time in a dozen years the state can boast that accomplishment. He has benefited from a voter initiative that reduced the legislative threshold to pass a budget to a simple majority, from two-thirds under Schwarzenegger.
Standard & Poor’s at the time called the plan’s deficit solutions “realistic,” in line with the positive outlook it gave in February to California debt. The state of 37 million people has an A- general-obligation rating from S&P, six levels below the top and lower than any state.
“The problems of the state are much more self-inflicted wounds that they’re working on curing,” Brian Mayhew, chief financial officer of the Bay Area Toll Authority, which oversees state-owned toll bridges in the San Francisco area, said in a Sept. 17 interview at Bloomberg’s New York office. “And they’re past the impasse of the budgets not being approved until November.”
The yield on benchmark tax-free debt due in 10 years was little changed yesterday at about 1.78 percent, according to a Bloomberg Valuation index. The interest rate set a record low of 1.63 percent in July.
Following are pending sales:
MASSACHUSETTS plans to issue $1.6 billion of general- obligation debt via competitive sale as soon as next week, data compiled by Bloomberg show. The debt will finance capital projects. (Updated Sept. 20)
VIRGINIA HOUSING DEVELOPMENT AUTHORITY is set to sell $175 million of taxable revenue debt as soon as next week, data compiled by Bloomberg show. (Added Sept. 20)
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