SAN FRANCISCO — Retail investors gobbled up nearly two-thirds of California’s $1.55 billion general obligation bond sale over two days, tightening yield spreads in search of better returns and relief ahead of a potential tax hike in November.
The state sold more than $1 billion to retail investors, or more than 65.8%, on Friday and Monday, according to the State Treasurer’s Office, tightening spreads significantly compared with its spring sale.
The high demand from the retail investors pushed the treasurer’s office to price the deal a day early on Monday for institutional investors. Citi and RBC Capital Markets are the senior managers.
“I think it is really a combination of factors. The market is continuing to be strong and yields are continuing to be very, very low. I think it is an opportunity to get a little more yield,” said Kelly Wine, executive vice president of R-H Investment Corp., a broker-dealer in Los Angeles. “I think [the potential for higher taxes] must be a factor as well. I would imagine it would be driving a lot of people.”
California GOs have moved around 20 points tighter since the state's April sale compared to the Municipal Market Data triple-A index in all comparable maturities, with the five-year bond moving from a spread of 70 to 50 basis points during the first day of retail selling, and the 30-year going to 80 points from 104 basis points.
The 10-year bond tightened to 68 basis points by Monday morning after shifting to a 70-point spread compared to the index from 87 basis points.
“Obviously, this is an excellent result so far,” said Tom Dresslar, spokesman for Treasurer Bill Lockyer. “California GOs continue to perform well because the market recognizes the substantial strides we have made toward greater fiscal stability.”
California bonds typically pay higher yields compared to other states, and in-state residents may be watching two initiatives on the November ballot, one backed by Gov. Jerry Brown, that would raise income taxes on the wealthy, leading investors to seek a tax-exempt cover.
California’s GO credit is rated the lowest among states by both Standard & Poor’s and Fitch Ratings, both at A-minus. Moody’s Investors Service rates California A1, one notch higher than it rates Illinois.
California, typically the largest issuer in the country, has more than $80 billion of GO debt outstanding.
In Monday’s deal, $1 billion of proceeds will raise new money for various public works projects, and $550 million will be used to refund outstanding bonds.
California has more bonds on the calendar this fall, with the treasurer’s office set to sell $548 million of bonds for the California State Public Works Board on Oct. 17, and $500 million of GO refunding bonds, which will be in intermediate maturities, in a competitive deal on October 23.