Bonds

California plans to sell $4 billion in tax-free bonds next week to fund infrastructure projects, and the state is hoping for robust demand from individual investors. The offering is expected to be a big test of California's standing in financial markets amid a still-precarious budget situation. The last state bond sale was in June.

California's bond rating was downgraded below that of every other state Tuesday by a major Wall Street rating agency, as lawmakers trying to resolve the state's financial problems faced growing resistance from powerful interest groups. Citing the state's prolonged budget impasse and its nearly empty treasury, Standard & Poor's lowered its rating on $46 billion in general obligation bonds, which investors usually consider one of the safest investments because they are backed by taxpayers.

General Motors Corp.'s last-ditch, Hail Mary bid to avoid bankruptcy fell with a thud Wednesday as its bondholders overwhelmingly rejected a deal to swap their debt for equity in the company. That offer was a central element in the automaker's efforts -- guided by the federal government -- to restructure outside of court. Without it the company appears almost certain to file a Chapter 11 petition by Monday.

Wall Street is looking forward to learning California's short-term borrowing plans -- once Sacramento produces a fiscal 2010 budget more or less in balance. The bond market has been expecting that the state would seek short-term financing to bridge the gap between current cash needs and future tax revenue. Normally, this kind of borrowing -- via so-called revenue anticipation notes, or RANs -- is no big deal.

'Better safe than sorry" turned out to be the winning motto for many mutual fund managers and their investors, as 2007 made a sudden transformation from an easy-money era to a painful credit crunch. When the debt markets seized up in the wake of the housing downturn and mounting mortgage defaults, bond funds that shunned risky sub-prime securities in favor of government IOUs and other relatively safe holdings notched solid returns.

A unit of Ambac Financial Group Inc. lost a crucial top AAA credit rating Friday, raising questions about the bond insurer's ability to win new business and possibly forcing some investors to sell billions of dollars of municipal bonds and other securities guaranteed by the company. Fitch Ratings cut Ambac Assurance Corp.'s top rating after the bond insurer, citing weak demand, scrapped plans to sell $1 billion of new equity. Ambac, the world's No.

New York state insurance regulators confirmed Wednesday that they met with some major U.S. banks to discuss raising fresh capital for struggling bond insurance companies. Talks with the unnamed banks were part of New York State Insurance Superintendent Eric Dinallo's effort to stabilize the bond guarantors and bolster the industry's finances, agency spokesman Andrew Mais said.

A proposal by the Schwarzenegger administration to use $170 million in voter-approved bond money for projects benefiting two private railroads is drawing ire from Southern California officials who want the funds for road improvements and other projects.

It was easy for many small investors to ignore the credit markets' woes a few months ago, when the crisis was centered in high-risk mortgages owned by big-money investors. Now, the credit crunch is getting a lot more up-close and personal for investors in markets far afield from dicey home loans -- including municipal and corporate bonds. As in a bad horror movie, the monster's tentacles are groping around.

It's a great time to be a buyer of high-quality tax-free municipal bonds. Except that it might be an even better time in a week or so. Or several months from now. When the state of California tries to raise $1.75 billion early next week in one of its periodic sales of general-obligation bonds, it is likely to have to pay the highest interest rates in four years, at least on securities maturing in 20 years or more.