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UPDATE 1-California's $5.5 bln note sale commands yields at 40-year lows
August 15, 2013 / 6:31 PM / 4 years ago

UPDATE 1-California's $5.5 bln note sale commands yields at 40-year lows

WASHINGTON, Aug 15 (Reuters) - California sold $5.5 billion worth of revenue anticipation notes (RAN) on Thursday at the lowest yields for the short-term debt that the state has seen in more than 40 years.

The bulk of the deal, $4 billion of notes maturing in June 2014, was priced to yield 0.23 percent. The remaining $1.5 billion of notes, maturing one month earlier in May 2014, were priced to yield 0.21 percent. Both maturities had coupons of 2 percent.

Those were the lowest yields in a RAN sale since at least 1971, the earliest year for which data are available, according to the state treasurer’s office. And they stand in marked contrast to last August’s sale of $10 billion of notes, which cover short-term cash needs. In that sale, the May 2013 maturity had a yield of 0.33 percent and the June 2013 maturity a yield of 0.43 percent.

“We received excellent demand for the RANs and an outstanding price for taxpayers,” said California Treasurer Bill Lockyer in a statement. “The results add to the accumulating evidence of growing investor confidence in California’s fiscal management.”

“The size of the RAN sale itself illustrates one factor driving the state’s stronger market standing,” he added. “The $5.5 billion is about half of last year’s $10 billion, and that reflects the state’s much-improved cash position.”

J.P. Morgan Securities was the lead underwriter on the deal.

“A strong demand on short-term assets and a better credit outlook for California were reflected in the pricing,” said Domenic Vonella, an analyst at Municipal Market Data, a unit of Thomson Reuters.

Vonella said that yields on Thursday for similarly rated notes on MMD’s “MIG 1” scale were only slightly lower than the California debt - at 0.18 percent on the June 2014 maturity and 0.17 percent on the May 2014 maturity.

Moody’s Investors Service had assigned the notes a ‘MIG 1’ rating, noting California’s cash is expected to be “sufficient to repay the notes with healthy additional cushion.” Standard & Poor’s Ratings Services had assigned them its ‘SP-1+', noting the state has a “strong capacity” for repaying the debt by the end of June 2014 and “the state’s liquidity has recovered enough to accommodate a relatively severe degree of stress.”

Demand was strong enough to slightly push down yields in repricing, from 0.22 percent for the May maturity and from 0.24 percent for the June maturity in preliminary pricing.

During Wednesday’s retail order period individual investors snapped up $1.65 billion of the debt. The yield range quoted to retail buyers for the May maturity was 0.18 percent to 0.23 percent and the range for the June maturity was 0.20 percent to 0.27 percent, according to the state treasurer’s office.

California’s fortunes have experienced a remarkable turnaround over the last year. Voters in November approved a ballot measure lifting the state’s sales tax and increasing personal income tax rates on the wealthy.

The new revenue, along with spending restraint and a strengthening economy, helped the state end last fiscal year with $2 billion more in revenue than Governor Jerry Brown’s revised budget plan projected. In the budget for the current fiscal year, which began on July 1, general fund spending is up slightly to $96.3 billion from $95.7 billion and the state has an emergency reserve of $1.1 billion.

In the open market on Thursday, Treasury notes due in May 2014 were yielding 0.13 to 0.15 percent, and those due in June 2014 yielded 0.15 percent. Treasuries are taxable, whereas the interest paid by the California notes is not taxed.

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