California bond yields rise to record

Bloomberg

Bonds due in 10 years yield about 0.53 percent, more than general obligation bonds rated A+, the most since early 2004, according to Bloomberg municipal bond yield indexes. California has approval to sell $53 billion of bonds for public works projects.

The most-populous state of the U.S. will run out of money to pay bills as soon as February unless lawmakers end an impasse over how to close the funding gap. California has the second-lowest credit ratings in the U.S. because of perennial fiscal shortfalls and legislative gridlock.

"The spreads have widened. Investors are getting more compensation for California bonds," said Paul Brennan, who oversees about $12 billion in municipal-bond funds for Nuveen Asset Management. "There’s still a lot of ups and downs to come unless there’s some dramatic budget agreement that could change all that."

California general-obligation bonds maturing in 2038, with a stated interest rate of 5.25 percent, traded at 81.9 cents on the dollar to yield about 6.66 percent, according to the Municipal Securities Rulemaking Board. That’s 1.57 percentage points more than three months ago.

Lawmakers have been deadlocked over how to fix the budget since November, when Governor Arnold Schwarzenegger called them into a special session. The only proposal to reach his desk is an $18 billion package of tax increases and spending cuts that he vowed to veto.

Schwarzenegger, a Republican, ordered state workers to take two days of unpaid leave each month and all departments to cut employee costs by as much as 10 percent. The impasse forced a state panel Dec. 18 to cut funding for $3.8 billion of construction on schools, roads and other public works, a decision officials said might cost tens of thousands of jobs.

"Until we have solved our budget crisis ... there’s no confidence out there in us, and no one is going to buy our bonds," Schwarzenegger told reporters Dec. 21.

The decision will shut down or delay work on dozens of projects, including veterans’ homes, prisons, schools and rural outposts that fight wildfires, according to a list from state officials.