California muni bond sale draws heavy demand

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Yield-hungry individual investors have snapped up nearly two-thirds of California’s $2-billion tax-free bond offering, which the state launched on Tuesday.

As of 10 a.m. Wednesday, the state had orders for $1.29 billion of the general-obligation bonds, or 65% of the total, according to Joe DeAnda, a spokesman for Treasurer Bill Lockyer in Sacramento.

That’s a strong turnout by individual investors. By contrast, they bought 32% of a $1.3-billion bond deal the state sold in October.

Despite California’s budget struggles and its weak credit rating (the lowest of the 50 states), investors are being lured by attractive tax-free yields on the bonds, which will fund voter-approved infrastructure projects. Interest on the securities is exempt from federal and state income tax.

The preliminary tax-free yields on the bonds range from 1.17% on the issue maturing in 2012 to 5.7% on the issue maturing in 2036.

The deal already is oversubscribed in many of the maturities, including 2015 through 2019, DeAnda said.

Individual investors can place orders via brokerages through Wednesday. On Thursday, institutional investors such as mutual funds will bid for the remaining bonds. That is when the final yields on all of the securities will be set.

If institutional demand is strong, the state may reduce the yields on the bonds. Individual investors can cancel their orders if they don’t like the final yields.

More details on the sale are here and here.

-- Tom Petruno