California bonds snapped up

The state has attracted record demand from individuals - 70 percent of the $1.75 billion of bonds it put on the market. That’s huge (normally, issuers are happy if they place just 15 to 20 percent with individuals). Of course that's what happens when yields on long-term obligation bonds hit 5 percent. Benchmark tax-exempt rates now exceed U.S. Treasury yields after last month's slump in demand from banks, hedge funds and other institutions. From Bloomberg:

”We're telling everyone we can to sell Treasuries and buy munis,'' said Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina. State and local government bonds typically yield less than Treasuries because they pay interest exempt from income taxes, while bonds sold by the federal government don't. Today's rally drove tax-exempt yields as much as 15 basis points lower from yesterday, traders said. A basis point is 0.01 percentage point. Top-rated 30-year general obligation bonds had risen to 5.01 percent yesterday, the highest since July 29, 2004, Municipal Market Advisors said.

California carries relatively low ratings of A+ by Standard & Poor's and Fitch Ratings and A1 by Moody's Investors Service. State officials have complained that the process by which the ratings are determined exaggerates risk. But keep in mind that California is forgoing bond insurance.