$3 Billion in Bonds Sold by California

California on Monday sold nearly $3 billion in deficit-plugging bonds, this time in securities with floating interest rates.

The deal, which appeared to be well-received by big investors, completed the initial phase of the debt refinancing that voters approved in March -- and left the state with about $4 billion in borrowing power in reserve.

California got about $4.5 billion in bids for the bonds sold Monday, almost exclusively from institutional investors such as money market mutual funds, said Peter Taylor, a managing director at lead underwriter Lehman Bros. in Los Angeles.

The initial annualized tax-free interest rate on the new securities is slightly above 1% and is expected to rise if rates in general continue to advance: The rates on the bonds are set up to adjust with market changes either daily or weekly, typical for these kinds of securities, analysts said.

The state would face rising interest costs on the debt if the Federal Reserve tightens credit soon, as expected, but the starting rate of about 1% on the new bonds is far below the 4% average cost of the $7.9 billion in long-term, fixed-rate deficit-plugging bonds the state sold May 5.

The difference in rates, Taylor said, means “the state still will save money” using variable-rate debt compared with fixed-rate debt unless short-term interest rates rise dramatically.

The sale of the variable-rate bonds was timed in part to attract investors who hold $14 billion in short-term California notes that mature this month. Many of those investors are money market mutual funds and others that generally own only short-term securities or long-term bonds that act like short-term issues because of their floating interest rates.

“There is big demand for short-term paper,” said Mary Beth Syal, a municipal bond expert at money manager Payden & Rygel in Los Angeles.

A spokesman for California Treasurer Phil Angelides said healthy demand allowed the state to pay less than had been expected on the bonds.

Voters in March approved the issuance of $15 billion in long-term bonds to refinance budget deficits the state has racked up in recent years. But bigger-than-expected gains in tax revenue have allowed California to pare its near-term borrowing needs.

By holding the variable-rate bond sale to $3 billion and the fixed-rate bond sale in May to $7.9 billion, the state still could issue as much as $4.1 billion in additional deficit-plugging bonds this year, if needed.

The variable-rate bonds were sold in 21 individual series, with the longest-term bonds maturing in 2023. The bonds with rates that will change daily had an initial rate of 1.05%; the bonds with weekly adjustments had an initial rate of 1.08%. The interest is exempt from federal and state income tax.

The bonds had a minimum initial investment requirement of $100,000.