California debt binge shakes up muni bond market

From the Los Angeles Times' Money & Company blog:

The municipal bond market’s message to California: Enough with the borrowing already!

Over the last seven weeks the state has sold more than $21 billion of short- and long-term debt for budget-related reasons and to finance voter-approved infrastructure projects.

That flood -- in a period when muni bond yields nationwide already were rebounding after diving in summer -- has helped to boost yields more than they might otherwise have risen, some analysts assert.

"Yields are higher because California has so much paper in the market," said Matt Fabian, who tracks muni bond trends at Municipal Market Advisors in Westport, Conn.

The state has been its own worst enemy: Its borrowing costs have risen with each bond deal, which means taxpayers will bear a bigger hit to service the debt over time.

Rising market yields also have the effect of devaluing older fixed-rate muni bonds. If you own a California muni-bond mutual fund, chances are its share price has been sliding since the end of September as the market has suffered indigestion from the supply of new bonds.

In California’s latest offering -- a sale Tuesday of nearly $1.9 billion of bonds maturing in June 2013 -- the state had to pony up for a 4% annualized tax-free yield to lure investors to the deal.

Less than two weeks ago the state paid a yield of 2.48% on a bond with a similar maturity....MORE