Rate Increase in California Prelude to more?

This is a big deal a prelude to national interest rate increases which will be fought tooth and nail by the financial industry. Keep rates low to keep the zombie industry alive and suffer the consequences of carry trade, precious metal stampedes and price/supply shocks. Raise the rate and send the economy into a potential deflationary spiral and potential collapse as paying back the debt becomes impossible.

Very tough situation indeed for the US Economy and the world.

California Raises Yield, Cuts Amount to Draw Bond Buyers
State paid more than a company to sell taxable portion

By Deborah Levine, MarketWatch

NEW YORK (MarketWatch) -- California on Thursday increased the yield offered to investors on its tax-exempt and taxable bonds and had to reduce the amount of taxable debt to entice enough investors to buy the securities, a multibillion-dollar debt sale that analysts had expected to go smoothly.

Bond traders said the state offered tax-exempt 20-year general-obligation bonds at 5%, up from 4.63% on Tuesday.

On Thursday, the amount of tax-exempt debt remained at $1.3 billion, while the amount of taxable debt was cut to $2.825 billion, down from its original plan to sell $3.2 billion.

Even with a higher yield, investors know that the Golden State's budget problems probably mean more debt issuance in the near future, potentially on better terms.

"This was not good enough to make us jump up and down," said Matt Buscone, a portfolio manager at Breckinridge Capital Advisors, which manages more than $10 billion. The yield levels are "fair," he said, adding: "We'll be able to do it again so we'll take a pass at this sale."

He said the firm bought California general-obligation bonds at its last sale in the spring, when long-term yields stood around 6%.

After two days of orders from retail buyers, the office of California Treasurer Bill Lockyer said it took orders from retail buyers for 33% of the tax-exempt portion and 31% of the taxable debt offered to individual investors, less than half the proportion taken at the state's short-term note sale last month.

At California's sale last month of revenue-anticipation notes, which mature in less than a year, the state said that it received orders for more debt than was sold and that about 75% of the issue went to retail buyers.

California has the lowest credit ratings in the U.S. on its long-term debt, with its $75 billion in tax-supported debt rated Baa1 by Moody's Investors Service, BBB by Fitch Ratings and A by Standard & Poor's.

With lingering concerns about the state's budget and with other opportunities available in municipal bonds, "I don't know if institutional buyers will be willing to pay up at these levels," said Domenic Vonella, a municipal-bond analyst at Thomson Reuters.
Taxable bonds

At the same time, the state sold taxable bonds in the form of federally-subsidized Build America Bonds that have been extremely popular for both issuers and investors since the program was created in February.

The $1.75 billion in 30-year bonds were offered at a yield that is 3.25 percentage points over comparable Treasurys /quotes/comstock/31*!ust30y (UST30Y 4.08, +0.07, +1.85%) , the higher end of what was anticipated, according to Informa Global Markets. That put the yield around 7.23%.

Last week, the state's Build America Bonds were trading at a spread of 2.65 points. A bigger gap indicates investors are demanding a better yield in return for taking on the risk of holding the debt.

That compares to the average spread for comparable corporate debt of 2.31 percentage points, according to an index compiled by Bank of America's Merrill Lynch unit.

Still, the spread the state had to pay is an improvement from when the state sold the Build America Bonds, for about 3.65 points above comparable Treasurys.

California also declined to issue 15-year debt as part of the deal, and cut in half the amount of 4-year notes to $125 million, according to Informa, which indicates less demand for those maturities.

The rest of the taxable sale was comprised of $250 million in 5-year debt at 4.635% and $700 million in 10-year securities with a yield of about 6.057%