Strong Bond Demand Bodes Well for State

California, which in recent years has paid sharply higher interest rates than other states to borrow via bond sales, on Thursday had its penalty somewhat reduced by investors.

Strong demand for a $1.8-billion general obligation bond deal suggested that the state’s fiscal image with investors has improved, which could bode well for a larger sale of deficit-plugging bonds California plans for early May, analysts said.

General obligation bond proceeds typically are used to fund infrastructure projects such as schools and roads.

It cost the state more, overall, to issue bonds Thursday than when it sold $2 billion of the securities in February. But that is because interest rates in general have surged over the last four weeks amid more signs that the U.S. economy is accelerating.

The bonds were sold in maturities ranging from one year to 30 years. The 20-year securities in Thursday’s offering will pay an annual tax-free yield of 5.23%, according to Merrill Lynch & Co., which managed the sale.

That was up from 4.93% on bonds of that maturity the state sold Feb. 19.

But the yield on the 20-year bonds sold in February was about 0.80 point more than what states with the highest credit ratings were paying at the time, according to municipal bond indexes compiled by Moody’s Investors Service in New York.

In Thursday’s sale, the yield on California’s 20-year bonds was about 0.50 point more than the highest-rated muni bonds.

California, which has suffered deep budget shortfalls in recent years, has the lowest credit rating of any state. Moody’s gives the state a grade of BAA-1; the firm’s highest rating is AAA.

The narrower difference between California’s bond yields and those of top-rated states indicates “that investors are feeling strongly about the state’s recovery and credit improvement,� a spokesman for state Treasurer Phil Angelides said.

The state won’t sell more general obligation bonds until later this year. That may have encouraged some yield-hungry investors to step up Thursday, said Mary Beth Syal, a muni bond expert at money management firm Payden & Rygel in Los Angeles.

She noted that the deficit-plugging bonds the state was scheduled to sell beginning in early May were expected to carry higher credit ratings -- and thus lower yields -- because they were expected to be backed by specific sales tax revenue.