Beginning on Tuesday, the state will sell $5.4bn of so-called revenue anticipation notes, or RANs, in an annual fundraising that bridges the seasonal gap in its revenues, much of which arrive in the spring. On Friday, it will commence the sale of up to $2.6bn of general obligation bonds.
Yields on triple A rated 10-year municipal bonds were 2.07 per cent last Friday, according to an index from MMD, the lowest level since the group began tracking them in 1985 and down from 2.63 per cent on August 1.
Default fears have also eased and “munis” have delivered total returns of 8 per cent this year, a Barclays Capital index showed, after losing more than 4 per cent in the fourth quarter.
Muni issuance this year is at the lowest level in more than a decade amid a mood of austerity among public officials, but some analysts forecast that low yields will lead to an uptick in issuance.
California, the biggest issuer of state debt, scrapped some debt sales earlier this year, a factor that is expected to boost demand now. The state could achieve historically low rates of under 50 bps for RANs that come due next June, analysts said. The state will decide during the offering period whether to add another maturity.
“Because cash is earning next to nothing, California retail could be big buyers [in the RAN sale],” said Peter Hayes, head of the municipal business at BlackRock.
California pays higher interest rates than most states due to its chronic deficits and dysfunctional budget process. Some money market funds now are offering just a few basis points.
Investors also have been cheered by revenue growth from states coming off the budget deficits that ballooned in the aftermath of the recession. California this year passed a budget on time for the first time in several years.
But historically low rates could prompt an uptick in issuance. Chris Mauro, head of municipal research at RBC Capital, has raised his full-year issuance estimate to $256bn-$275bn from $250bn.
But at these low yields, the muni bond market could be vulnerable. “The economy has slowed, which may lead to some slower revenue [growth for states],” Mr Hayes said. “That might be the risk for municipal credit over the next quarter.”
Decisions from the committee charged with making $1,200bn federal budget cuts by November 23 could also affect state and local governments.
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