California Bond Yield Penalty Narrows on Demand
California (STOCA1), poised for its first credit upgrade by Standard & Poor’s since 2006, has sold almost one-third of a $1.35 billion debt issue with its relative borrowing cost at the lowest point in more than three years.
California took bond orders from individuals for a second day, including securities due in 10 years with a preliminary yield of 2.82 percent, said Tom Dresslar, a spokesman for Treasurer Bill Lockyer. The yield, unchanged from yesterday’s marketing, is 62 basis points more than a Bloomberg Fair Value index of top-rated bonds. The yield spread for California issuers over AAA debt hasn’t been that narrow since 2008, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
S&P puts California’s general obligations at A-, its fourth-lowest investment grade and the worst ranking for any state. The credit-rater in February changed its outlook to positive after Governor Jerry Brown, 74, and lawmakers took steps to ease a looming cash shortfall and cut the $20 billion annual structural deficit by three quarters.
“They’re definitely getting a better acceptance right now, just given that they’ve taken some positive steps over the last year,” said Daniel Solender, who manages more than $15 billion of municipal securities at Lord Abbett & Co. in Jersey City, New Jersey. “The deficits looking forward, while still sizeable, aren’t as big as they were.”
Dresslar said that as of 10:15 a.m. local time, investors had ordered $392 million of the securities. He said yields across the board were unchanged from yesterday.
“We determined, based on market conditions, that was the way to go,” Dresslar said by telephone. “The narrower spreads speak to the budget actions taken over the past couple of years by the governor and the Legislature.”
Lockyer is selling $890 million of general-obligation bonds for public works and $464 million to refund debt. He’ll seek final pricing with institutions such as mutual funds tomorrow. He offered 30-year maturities at 4.45 percent for a second day, or 77 basis points more than the index of top-rated securities.
Brokers took orders for 25 percent of the debt during the first day of sales, Lockyer said. By comparison, 38 percent was sold on the first day of a $2 billion offering last month.
California has reduced the amount of general-obligation bonds it sells to the smallest two-year total since 2006 as lawmakers work to erase budget deficits. The latest issue will probably be the state’s last until around October, Dresslar said.
Combined with a proposal by Brown to raise income taxes, the lack of new offerings has stoked demand after municipal-bond yields reached four-decade lows earlier this year. The rate on general-obligation debt maturing in 20 years fell to 3.6 percent in the week ended Jan. 19, the lowest since April 1967, a Bond Buyer index shows. The index climbed to 4.08 percent last week.
The narrowing difference between California bonds compared with top-rated debt has cooled interest among some investors.
“We did see the deal and perceived it as narrow and so we declined it,” said Josh Gonze, co-manager of the $297 million Thornburg California Limited-Term Municipal Fund in Santa Fe, New Mexico. “But other investors will approve of it and say yes. So they will get the deal sold.”
Brown, a Democrat, has proposed erasing a $9 billion budget deficit partly by asking voters to temporarily raise income and sales taxes at the ballot box in November. If that fails, his plan calls for $5 billion of automatic cuts midway through fiscal 2012, which begins July 1. Most would come from schools.
The state’s fiscal condition remains precarious. March revenue trailed budget projections by 4.2 percent, missing the forecast by $233.5 million, according to Controller John Chiang.
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