California, the largest borrower in the U.S. municipal market, sold $1.75 billion of bonds after attracting record demand from individuals drawn to the highest tax-exempt yields in more than three years.
The state received orders from more than 4,000 investors equal to over 72 percent of the bonds available, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer. Officials, who were to complete the sale tomorrow, wrapped it up early by selling the rest of the debt to institutions.
Municipal bonds snapped 14 days of declines as the highest long-termyields since July 2004 attracted individuals and investors who don't normally buy state and local debt, traders said. Benchmark tax-exempt rates compiled by Municipal Market Advisors exceed U.S. Treasury yields after last month's slump in demand from banks and selling by hedge funds.
``We're telling everyone we can to sell Treasuries and buy munis,'' saidRobert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina. State and local government bonds typically yield less than Treasuries because they pay interest exempt from income taxes, while federal bonds don't.
Big Gains
Today's rally drove tax-exempt yields on top-rated debt lower by 5 basis points to 8 basis points, based on indexes from Municipal Market Advisors. A basis point is 0.01 percentage point. Yields on 30-year general obligation bonds fell 7 basis points, the most in six months, to 4.94 percent, the Concord, Massachusetts-based research firm said.
New York City bonds backed by school-building aid revenue from the state and due in 2026 traded in a $1 million block at 100.6 cents on the dollar for a yield of 4.92 percent today, compared with 97.7 cents and 5.20 percent yesterday.
California, with the second-lowest credit ratings among U.S. states after Louisiana, sold bonds today at yields ranging from 2.85 percent on debt due in two years to 5.40 percent on securities maturing in 2038. The state's underwriters, led by Siebert Brandford Shank & Co., were able to raise prices and cut yields by as much as 24 basis points from yesterday's preliminary rates.
For at least the third time in four months, California didn't buy insurance against default for its bonds. ``At this point and time, given the market and the situation with insurers, insurance has no value to taxpayers,'' Dresslar said. ``Until and unless the market assigns value to it again and it makes financial sense again for taxpayers, we are not going to buy insurance.''
Five of the seven top financial guarantors have seen their business decline in the municipal market since subprime-related losses prompted rating companies' scrutiny and downgrades.
Auction-Rate Woes
Concern that insurers' finances may deteriorate further prompted declines in the municipal bonds they guarantee, and led to record failures in the auction-rate market, driving up municipal debt costs as high as 20 percent last month.
The average rate for bonds whose interest is set at auctions every seven days was 6.52 percent Feb. 27, up from 3.92 percent on Jan. 30, according to a Securities Industry and Financial Markets Association index.
California, which is rated A+ by Standard & Poor's and Fitch Ratings and A1 by Moody's Investors Service, is leading an effort to change the way municipal bonds are ranked. Officials say their ratings exaggerate the risk that states and cities might default on their debt.
``The system misleads investors by providing inaccurate information about risk, and costs American taxpayers billions of dollars in higher interest rates and bond insurance premiums,'' Lockyer said in a statement today.
Top Ratings
California would be rated Aaa if assessed using the same criteria as corporations, along with every other state except Louisiana, according to Moody's Investors Service.
If the most populous U.S. state had top credit ratings, California might save more than $5 billion over the 30-year life of the $61 billion in yet-to-be-sold, voter-approved debt, Lockyer and 14 other municipal officials from Connecticut to Maine said in a letter to the three major rating companies.
Issuers are pushing for change after municipal bonds fell 4.9 percent last month, the most since Merrill Lynch & Co. started compiling the index in 1989. Insurers' woes boosted floating-rate borrowing costs and reduced the value of long-term bonds, squeezing hedge funds and other institutions that use borrowed money increase holdings.
``Billions and billions of dollars of bonds hit the market, and it has caused the municipal market to cheapen, as a percentage of Treasuries, to a point few if any traders have ever seen,'' said Kenneth Naehu, who oversees fixed income investments for Bel Air Investment Advisors LLC in Los Angeles. The firm manages $5 billion. ``That has created opportunities.''
More Than Treasuries
Naehu said he has bought 15- to 20-year municipal bonds for the last several weeks that yield as much as 140 percent of similarly dated Treasuries and also placed orders for the California debt. The rout has started to draw in new investors to the tax-exempt market, which saw prices collapse after hedge funds and dealers' ``tender-option bond'' programs sold holdings to raise cash to meet margin calls, he said.
``For the buyers, it has taken them a while to come to grips with the notion that this is not a credit issue, it's a liquidity issue,'' Naehu said. ``It's a tremendous buying opportunity.''
Among investors buying as municipal hedge funds sold last week was Bill Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund.
Gross told Reuters he bought $1.5 billion in municipal bonds on Feb. 29 at ``very attractive prices.''
In New York, the Thruway Authority sold almost $500 million of bonds today after individuals placed orders for about 54 percent of the deal during another order period dedicated to buyers of less than $1 million apiece. The Albany-based authority usually sells about 30 percent to ``retail buyers,'' said John Bryan, chief financial officer.
To contact the reporter on this story: Jeremy R. Cooke in New York atjcooke8@bloomberg.net.
