Glut Alters State’s Muni Bond Plans

A sudden glut of new California municipal bonds has pushed yields up, causing the state to cut back some of its planned financings.

Muni bond dealers say California investors have been swamped with too many bond offerings by the state and state agencies in recent weeks, leaving brokerages saddled with inventory.

Yields on some long-term state bonds, which were in the 4%-to-5.25% range two weeks ago, have risen as much as 0.20 percentage points as sellers have tried to lure buyers back to the market.

The trouble began after the state sold $800 million in general obligation bonds Sept. 28. Traders say the lead underwriter in that offering, Merrill Lynch, was surprised at how many bonds flooded back onto the market after the sale.

That offering was followed by the sale of $315 million in prison bonds and a $100-million bond deal for the state’s university system.

Then, in a surprise to bond dealers, the state decided to make another general obligation bond offering this month to take advantage of long-term interest rates, which are at 20-year lows.

But Wall Street balked, arguing that the market was flooded. In a concession to bond dealers, state Treasurer Kathleen Brown has agreed to downsize the general obligation offering and delay another planned university bond sale.

Hal Geiogue, assistant state treasurer, said the general obligation bond sale Thursday will be $150 million instead of $250 million. The planned $140-million university bond deal will wait until early in November, he said.

“We want the market to clear out,” Geiogue said.

Although analysts agree that the tax-exempt yields on California munis are lucrative for upper-income investors, some large buyers (such as mutual funds) are concerned that yields may rise further if the proposed state sales tax increase on the November ballot does not pass.

Investors fear that strapped local governments would then turn back to the state for a bailout, potentially hurting the state’s credit rating.