Sometimes there is something to the market

Investors snap up California debt on first day of issuance

by Brian Leubitz

Sometimes you can learn something from a market, or maybe the credit rating agencies can learn something from a market.  Specifically, we’ve been downgraded to just over junk status, yet we have state constitutional rules that prioritize debt service over everything but K12 education. In other words, even if we didn’t raise revenue in any way, we would be legally required to cut, cut, cut our way into paying back bond investors.

And perhaps investors understand something that the credit rating agencies aren’t acknowledging, as they gobbled up California debt quickly yesterday as  Lockyer’s office offered some short-term debt to cover some gaps.

Yield-hungry individual investors on Tuesday put in orders to buy more than half of the short-term notes that California is selling this week to raise cash.

Brokerages handling the deal for state Treasurer Bill Lockyer said they had orders for $3.05 billion of the notes, or 56.5% of the planned $5.4-billion deal, by late afternoon.

The brokerages will continue to take orders from individual investors on Wednesday. Institutional investors will bid for what’s left on Thursday, which is when final interest rates will be set.

The state is preliminarily estimating that the nine-month notes will pay an annualized tax-free yield of between 0.40% and 0.55%. Because that interest is exempt from state and federal income taxes it’s equivalent to a higher taxable yield, depending on an investor’s tax bracket. (LA Times)

We’re still slightly higher than Texas, but hardly a “failed state.”  You want to see failed state? Greece is paying 111.7% for its 1-year  debt, and well, at this point you have to assume the interest pressures are close to breaking the EU. Investors are fairly well convinced there will be a Greek debt default.  

Now, I’ll not get too into the weeds here, as there is a lot to digest here. But, I will add the disclaimer that these bonds were actually given the credit rating agencies’ highest rating. Apparently they are high on our short term debt.  But from a macro perspective, Lockyer, in general, hasn’t had a huge problem selling our debt.  Perhaps the market is saying something…

2 thoughts on “Sometimes there is something to the market”

  1. I wish I could get in in that greek debt!

    I buy into a California Bond fund. The percentage is over 5% and its tax-free so I use it as a savings account. best move I ever did.  Being California I know that the state has issues but its far from insolvent. It looks like the bond rating is just pressure to change policies from investers (to change our business) rules so they can buy into California cheap.  Fortunately for me that means I get a pretty safe investment at a high interest rate.

    On another note – I’d like to change politician rules so that when they have to sell stock to avoid conflict of interest they have to buy state bonds. Plus I’d make any pension or retirement system that they get for being office solely denominated by California bonds. that way they have a stake in the health of our state.

  2. Once again we are reminded that not every risk can be priced rationally. How many decades does it take for that to sink in? As a prospective investor, an interest rate over 100 percent tells me the best I can hope for is to receive a few months’ interest, followed by default. The very act of buying those bonds helps push Greece closer to the edge. I fail to see how such a transaction can benefit either party.

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