California Ends Bond Drought With Biggest Sale Since 2013by
State sold $2.9 billion of general-obligation securities
Deal marks biggest offering for state since August 2013
At least one drought in California has come to an end.
The most-populous U.S. state sold $2.9 billion of general-obligation bonds on Tuesday, its first offering of the securities since October and the biggest since August 2013, according to data compiled by Bloomberg. The state boosted the size of the sale by about $600 million after investors placed their orders.
Tax-exempt securities due in September 2045 sold for yields of as much as 3.4 percent, according to data compiled by Bloomberg. The top yield was about 0.6 percentage points more than benchmark municipal debt that matures in 30 years, data compiled by Bloomberg show. The proceeds will pay for public-works projects and refinance higher interest debt.
“There’s been a lack of supply in the muni market so far in 2016,” said Gary Pollack, who manages $12 billion as the head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, who participated in the deal. “This was an ample opportunity for investors to participate in a large state GO deal, which has positive credit metrics.”
California, which grappled with budget shortfalls after the housing crash, is reaping the gains of a real-estate market revival and growth in Silicon Valley’s technology industry. Tax increases backed by Governor Jerry Brown have helped end the state’s once chronic budget deficits and allowed officials to bolster savings and pay down debt.
Wall Street has recognized the progress: In July, Standard & Poor’s raised California’s rating to AA-, the fourth-highest grade, the best for the state since 2001. Moody’s Investors Service rates California at a comparable Aa3.
“The state is in excellent condition,” Tom Schuette, co-head of credit research and portfolio management at Solana Beach, California-based Gurtin Fixed Income Management LLC, which has about $9.9 billion of state and local debt, said before the deal.
Bonds from the state have returned 3.77 percent over the last 12 months, tracking the gains in the broader muni market, according to Barclays.
With bond sales picking up as issuers take advantage of low borrowing costs, investors have pushed up the yields they demand California and other states relative to top-rated securities.
The extra interest they want to hold 10-year California bonds instead of benchmark debt widened to as much as 0.32 on March 3, the highest since July 2014, Bloomberg data show. That’s still low compared to other states: Illinois pays a 1.6 percentage-point penalty on 10-year debt because of the record political standoff that’s left it without a budget for more than eight months.
The California securities are backed by the government’s full faith and credit. Tuesday’s deal includes about $1.2 billion of debt for refinancing.
“We have a lot of customers that have California-specific funds, and they have money to put to work,” said Adam Buchanan, senior vice president of sales and trading at Ziegler, a Chicago broker-dealer, which plans to participate in Tuesday’s deal. “I know that the demand is there for California. There’s no doubt about that.”