Heightened retail demand propelled California's GO sale

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LOS ANGELES — When California sold $2.18 billion in general obligation Tuesday it experienced the largest retail demand for its bonds in five years.

The state had $1.4 billion in retail orders in the recent sale compared with $992.8 million during its last negotiated GO sale in August 2017, according to the treasurer’s office.

Individual maturities ranged from fully subscribed to as much as six times over-subscribed in some maturities, said Tim Schaefer, California Deputy Treasurer for Public Finance. The deal overall was two times oversubscribed,

“There just hasn’t been much California paper that has been issued in size so far this year,” said Tom Schuette, co-head of investment research and strategy for Gurtin Municipal Bond Management. “Year-to-date par value is about half of what it has been the past few years – so the deal came to market at a good time, and was priced at levels that obviously attracted a lot of interest.”

The sale included $1.52 billion in new borrowing authorized by 19 different bond acts and $663 million to refund outstanding general obligation bonds for debt service savings.

Interest rates on the bonds ranged from 2% to 5.25% while yields ranged from 1.3% to 3.72%. The overall true interest cost for the sale was 3.53%.

Schaefer also said the deal benefited from reduced supply after issuers pushed deals into December ahead of passage of the federal tax bill. At the same time, money available for investment was at a high point to start the year.

“So folks that aren’t market traders get into the market and discover a smaller supply and a name like California, which is high grade, but isn’t throwing the astronomically high prices that a more thinly traded bond would,” Schaefer said.

“Typically California will hold retail sales until 5 p.m. California time, instead they cut it off at noon,” said Rick Tilghman, managing director with Mischler Financial Group. “If it had gone another six or seven hours, retail would have been so much more. At $1.4 billion, they still cut some of that back to 50% of the sale, because institutional was 50%.”

Given the northeast weather reports anticipating a blizzard, it was a pretty easy decision to make, Schaefer said.

“What we worried about is that if blizzard conditions overtook the city that the institutional audience would not be there to answer the phone,” Schaefer said.

The weekly supply, at roughly $7.5 billion, exceeded the $3 billion to $4 billion range for muni issuance earlier in the year, Tilghman said.

“There was a fair amount going on this week,” Tilghman said. “The biggest was California, but a significant number of competitive deals were coming from different states, all of which contributes to competition for investors.”

Holding both retail and institutional sales on the same day didn’t appear to affect prices.

“I think they were able to maintain the prices levels they had going into the thing,” Tilghman said. “They were able to lower the yield on a couple of maturities, but not too much. There was a good mix of institutional and retail.”

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Sell side Primary bond market California