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

California was forced to raise yields on some longer bond maturities to complete a $2.1 billion general-obligation sale, the state’s first debt offering since Standard & Poor’s boosted its credit-rating in January.

The sale came in the worst week for state and local debt this year. Yields on benchmark 10-year munis rose 0.24 percentage point this week through yesterday to 2.08 percent, the highest since April, data compiled by Bloomberg show. Bonds are losing appeal as the Dow Jones Industrial Average climbed for a 10th straight day to a record, the longest winning streak since 1996, amid signs of a strengthening U.S. economy.

California’s 10-year bonds were priced yesterday to yield 2.56 percent, up from 2.54 percent a day earlier, 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,” Tom Dresslar, a spokesman for Treasurer Bill Lockyer said yesterday. “We came into a tough market with a large amount of new supply and obtained a good result for taxpayers.”

Investors made net withdrawals of about $113 million from muni mutual funds in the week through March 13, the most this year, according to Lipper US Fund Flows data. It’s the second straight week of net withdrawals.

Investors’ Thirst

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

The yield offered on the 10-year segment was about 0.48 percentage point above a Bloomberg Valuation index of AAA munis. The premium was 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, a Democrat, curbed pension costs, won voter support for a tax boost and proposed a budget for the 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.

Taxable Sale

Lockyer also sold $100 million of taxable bonds this week maturing in 2015 to yield 0.64 percent, or 38 basis points more than two-year Treasuries; and $264 million of three-year taxable securities priced to yield 0.93 percent, a spread of 52 basis points, Dresslar said. A basis point is 0.01 percentage point.

Separately, Lockyer remarketed $228 million of taxable Build America Bonds March 13. 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 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 stood at 0.57 percentage point yesterday. It was as low as 52 basis points March 11, the narrowest since November 2008, data compiled by Bloomberg show.

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