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California municipal bond sale opens to weak demand

The state's offering of $1.3 billion in notes to finance infrastructure projects attracts only $428 million in orders from individual investors. Institutional investors will place orders Thursday.

October 08, 2009|Tom Petruno

California came up short as it tried to sell longer-term municipal bonds to individual investors this week -- the first such sale since last spring.

The steep decline in market yields on muni bonds since July has left many investors unwilling to lock up their money in new bonds, traders said.

California, which is offering $1.3 billion in tax-free general obligation bonds to finance voter-approved infrastructure projects, said it took in orders for $428 million, or 33% of the total, on Tuesday and Wednesday. That wrapped up the advance-order period the state grants individual investors to allow them to buy bonds ahead of institutional investors.

The slack demand contrasts with investors' voracious appetite for the state's last sale of longer-term tax-free bonds, in March. On the first day of that deal, individual investors grabbed 75% of the $4 billion in bonds offered.

Bond yields were much higher then. The state paid an annualized tax-free yield of 5.85% on the 20-year bond in that deal. This time around, investors were tentatively offered 4.66% on the 20-year bond.

Long-term interest rates in general have tumbled in recent months as more investors have shifted cash into bonds, often from money market accounts that pay virtually nothing.

But the market has come so far so fast that many individual investors no longer find muni yields attractive, said Brad Thiel, head of muni bond underwriting at brokerage Wedbush Morgan Securities.

With a relatively small book of orders from individual investors, the state will have to rely on institutional investors, such as mutual funds, to buy the rest of the tax-free bonds. Those orders will determine final yields on the bonds.

The state is hoping to raise $4.5 billion in all this week for infrastructure financing, a large chunk of it by selling federally subsidized, long-term Build America Bonds.


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