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California pays up to lure wary muni bond buyers

The state raises the 30-year rate to 5.3%, up from 4.96% in April. The five-year issue pays 3.56%.

June 25, 2008|Tom Petruno | Times Staff Writer

The rich were on their way to getting richer Tuesday -- if they were buyers of long-term tax-free bonds in California's $1.5-billion debt offering. The not-so-rich fared OK too.

The market for municipal bonds in general has turned rocky in recent weeks, favoring buyers over sellers and pushing interest rates higher. That forced the state to pay up to sell its longest-term issues in Tuesday's offering.

The 30-year issue in the deal will pay interest at a 5.3% annualized rate, compared with 4.96% on 30-year bonds the state sold in early April.

Because interest on the bonds is exempt from state and federal income tax, that 5.3% is equivalent to a much higher taxable yield (such as on a corporate bond or bank CD), depending on an investor's tax bracket.

For the already very well-heeled -- Californians with taxable income of $1 million or more, which puts them in the 41.7% combined federal and state income tax bracket -- a 5.3% tax-free yield is the same as earning 9.1% on a taxable investment.

Further down the income ladder, a married couple in the 32% combined tax bracket (taxable income of $89,629 to $131,450) would have to earn a taxable yield of 7.8% to equal a 5.3% tax-free yield.

The state also sold shorter-term bonds in the offering, as is usual in such deals.

The five-year issue, for example, will pay 3.56% tax free, which in the 32% tax bracket is equivalent to a 5.23% taxable yield.

California Treasurer Bill Lockyer expects to use the bond proceeds to fund some of the state's huge backlog of infrastructure projects and to pay off higher-cost debt.

How safe are the bonds? California has the second-lowest credit rating of all the states, and the budget situation is dismal. But debt repayment is mandated by the state Constitution.

As for the muni bond market overall, the latest upheaval is partly related to fresh credit downgrades last week of bond insurance companies including Ambac Financial Group, MBIA Inc. and Financial Guaranty Insurance Co.

That has made it difficult for investors to properly value certain bonds insured by those firms, said Matt Fabian, senior analyst at Municipal Market Advisors in Westport, Conn.

The result: Many investors have stepped back from the muni market, period, he said.

Given that backdrop, "California did fairly well with its offering," Fabian said.


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