California suffered a painful snub by investors Thursday as the state's attempt to sell $4.5 billion in general obligation bonds failed to attract enough demand to raise the full amount.
After boosting interest rates on a chunk of the debt, the state cut the total size of the deal by 8% to $4.14 billion, Treasurer Bill Lockyer said.
The debt, split among taxable and tax-free bonds, will finance infrastructure projects.
Municipal bond analysts said California was, in part, a victim of circumstance: The bond market overall -- including muni, corporate and U.S. government issues -- hit a wall last week after months of ravenous investor and trader demand that had pushed yields sharply lower.
Depressed yields finally led to a buyer's strike, which drove "momentum" traders out of the muni market, analysts said.
Suddenly, "people are punting bonds," said Matt Fabian, senior analyst Municipal Market Advisors in Westport, Conn.
With investors insisting on higher yields on bonds in general before they'd buy, California was bound to be squeezed, analysts said. That also gave some investors an excuse to focus on the state's still-troubled fiscal situation.
Tom Dresslar, a spokesman for Lockyer, acknowledged that the state's weak credit rating -- the lowest of any state -- "didn't help" the bond sale.
What's more, institutional investors knew they could push the state for higher yields after bond orders from individual investors came in well below expectations: Of the $1.3 billion in tax-free bonds offered for sale, individuals ordered just 33%, or $428 million.
By contrast, when California offered $4 billion in tax-free bonds for sale in March, individuals grabbed 75% of them.
The lure in March was that interest rates were much higher. The state paid an annualized 5.85% yield on the 20-year tax-free bond sold in March, for example. In this week's offering, individual investors were offered a preliminary yield of 4.63% on the 20-year tax-free issue.
But the relative dearth of demand this time around forced the state to raise final yields across the board. The 20-year tax-free bond will pay 5%. The seven-year issue in the deal will pay 3.37%, up from the 3.1% initially offered.
The state was able to sell all $1.3 billion of tax-free debt it offered. It also sold $1.75 billion in 30-year federally subsidized Build America Bonds at a taxable yield of 7.23%.
The state cut back on two other taxable issues it had hoped to sell, abandoning a 15-year issue entirely.
Although California had to shell out higher interest rates than it had hoped, Dresslar noted that rates still were well below what the state paid in the spring bond sale.