Municipal Bonds

California on Wednesday became the biggest issuer so far of a new type of municipal bond that has caused investors to rethink the muni market overall -- in a way that is driving down bond interest rates. Robust investor demand allowed Treasurer Bill Lockyer to boost the size of a planned $4-billion bond offering to $6.85 billion. Proceeds from the securities will finance voter-approved infrastructure projects. Included in the deal were $5.

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.

Warren E. Buffett has a reputation as a philanthropist who cares deeply about the social issues of the day. But on Tuesday, the billionaire lived up to another part of his reputation: that of an opportunistic investor. Buffett said he had made an offer to three struggling bond-insurance companies to help them insure $800 billion in municipal bonds. In an interview on cable channel CNBC, Buffett said he was willing to reinsure muni bonds now covered by MBIA Inc., Ambac Financial Group Inc.

New York regulators are eager to consider splitting Financial Guaranty Insurance Co.'s core bond insurance businesses to protect municipal credit ratings against costly downgrades and stem troubles in the debt markets. FGIC said last week that it wanted to organize a new domestic financial guarantee insurer to "provide support for public finance obligations previously insured by FGIC." State Insurance Supt.

Municipal bond yields keep going higher -- but nervous investors still aren't biting. A lack of buyers for long-term tax-free bonds on Monday drove prices down and yields up for a ninth session. The yield on a Bloomberg index of 20-year California general obligation issues rose to 5.11%, up from 5.05% on Friday and the highest since mid-2004.

The credit crunch is taking a heavier toll on the municipal bond market, a favored sector for individual investors. Yields on tax-free muni bonds surged Thursday for the 12th straight session as many buyers stayed away. That's bad news for California, which plans to sell bonds next week to raise $1.75 billion for infrastructure projects. The annualized yield on an index of 40 long-term muni issues nationwide tracked by the Bond Buyer newspaper jumped to 5.33% on Thursday, up from 5.

Some investors who were hoping to grab lucrative tax-free yields on California municipal bonds went home empty-handed Tuesday, or with fewer bonds than they had ordered. The state said its sale of $1.75 billion in general obligation bonds attracted $4.3 billion in orders, with a record $1.56 billion of that coming from individual investors.

With Wall Street's credit crunch turning costly for many states, cities and other government entities, a California financing agency says it wants to help municipal borrowers cut their interest rates on certain pricey debt. Under the program, the California Statewide Communities Development Authority would buy floating-rate debt of municipal borrowers in the state from the investors who now hold the securities.

California Treasurer Bill Lockyer is embarked on a little-noticed, nerdy but noble crusade. He's trying to stop Wall Streeters from gouging state and local governments. That means state and local taxpayers. They're the ones getting fleeced when their governments issue bonds -- borrow -- to build roads, schools, water facilities and other public works.

The municipal bond market has had a rough ride in the last six months, but that could mean now is a good time to invest in the sector. For the second consecutive quarter, fallout from the sub-prime-induced credit crunch sent yields rising on most muni securities, although they didn't jump as high as they did in the first quarter.