Spreads have widened on California general obligation bonds in the secondary market, with retail investors the most frequent buyers.

A trader in Los Angeles said the secondary market has reacted to the news that Standard & Poor's placed California's A-rated GOs on Credit Watch with negative implications - but it has been tempered somewhat by the fact that "everybody knew it was coming."

"It's not a really well-guarded secret that the state has budget problems, and of course the rating agencies, having made so many mistakes in the past," the trader said. "What I've seen is that the spread is widening out on Cal GOs over the [Municipal Market Data triple-A scale]... Out around 10 to 15 years, the bid side was from 150 to 160 off a week or so ago, and it's widened out to about 165 to 170 off now."

Another Los Angeles trader said California paper has been "trading rather briskly" for the last couple of weeks. "Before then, when the yield spread wasn't there, people were not buying it. They wanted to get paid more to own the bond," the trader said.

A third Los Angeles trader said the interest in the GO paper has been primarily retail-driven.

"On the long end, we're still trading plus 130. We saw 5s of 38 go at a 6.02%, and the dollar price worked for these guys. Yes, it's higher on spread, but retail liked the dollar price," the trader said. "Since the news, since there's been so many bid-wanteds. Guys are kind of like, let me try this maturity and see how I do, and if I do well with retail, I'll go out there again and see what I can buy. They're marking stuff up 30 basis points for retail, and they're doing them."

The trader also noted that the California GOs have been trading very erratically. "It's the sloppiest market in the United States."

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