Rush is on for state IOUs

Individual investors Tuesday put in orders for $1.84 billion in short-term notes that California plans to issue, a strong reception that reflects the high tax-free yields the state is offering.

Brokerages managing the deal for the state will continue to take orders from individuals Wednesday, then invite institutional orders Thursday. That’s when the final yields on the IOUs will be set.

The sale of $4 billion in “revenue anticipation notes” is crucial for the state to patch its seasonal budget shortfall.

At $1.84 billion on Tuesday, individual-investor orders already account for 46% of the deal if it’s capped at $4 billion.

The state is offering two separate IOUs: a seven-month note maturing May 20 and an eight-month note maturing June 22.

Early Tuesday, Treasurer Bill Lockyer’s office estimated that the seven-month note would pay a tax-free annualized yield of 3.75% to 4% and that the eight-month issue would pay 4.25% to 4.5%.

The orders that flowed in showed most investors were going for the highest yield they could get: Orders totaled $1.51 billion for the eight-month note and $327 million for the seven-month issue.

Because interest on the notes is exempt from state and federal income tax, the yields are lucrative compared with what’s available on other securities.

Earning a 4.25% tax-free yield, for example, would be the same as earning a 6.51% taxable yield for a couple in the 34.7% combined federal and state tax bracket, which begins at taxable income of $131,451.

The minimum investment is $5,000. Investors must place orders via a brokerage; the state doesn’t take orders directly. If investors aren’t happy with the final yields Thursday they can cancel.

--

[email protected]

--

On latimes.com

Money & Co.

See what’s moving the markets at latimes.com/moneyandco.