Sale as Market Rallies-California Yields Drop for $2 Billion

The most indebted U.S. state, began taking orders from individuals for $2 billion of tax-exempt bonds with a preliminary yield of 2.7 percent for 10- year debt, a percentage point lower than on a sale in October.
The general-obligation sale comes as yields on top-rated municipal securities due in 10 years fell to a one-week low, according to a Bloomberg Valuation index. Yields (BVMB30Y) on AAA 30-year bonds approached the lowest level since at least January 2009. Treasury 10-year note yields traded at almost the lowest level in three weeks as the Federal Reserve bought U.S. notes.

“There’s a lot of pent-up demand out there,” said Alan Schankel, fixed-income director at Janney Montgomery Scott in Philadelphia. “Residents want to buy California bonds if they can so they don’t have to pay state tax.”

Governor Jerry Brown curbed borrowing last year to help shrink deficits. The state offered $3.3 billion in debt in 2011, the lowest amount in four years. That crimped the supply of California state and local bonds, which returned more than the full $3.7 trillion muni market in each of the past three years.

California last sold bonds in October, when a 10-year portion priced to yield 3.7 percent, according to data compiled by Bloomberg.
Initial Yields

Initial yields on this week’s sale range from 0.66 percent on two-year securities to as high as 4.38 percent on some 26- year bonds, according to a person familiar with the preliminary pricing who wasn’t authorized to disclose the terms. The state is offering the securities to individuals today and tomorrow. Institutional investors can place orders March 1.

Preliminary interest rates on the offering indicate the most-populous U.S. state will pay a smaller yield spread over benchmark debt than in October.

Yields on the bonds maturing in 10 years are being offered at about 80 basis points more than top-rated debt of the same maturity, which yields about 1.89 percent. The difference is down from 128 basis points on similar-maturity bonds in the October offer. A basis point is 0.01 percentage point.

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