California Sells $2.1 Billion of Munis With Recall Vote Underway

(Bloomberg) — California is selling $2.1 billion of tax-exempt general-obligation bonds Tuesday, just as its citizens cast their ballots to decide the fate of Governor Gavin Newsom in a recall vote.

Despite the political tumult, the sale comes on the heels of an outlook boost to positive from stable. Credit ratings for the state, which is the largest issuer of muni bonds, are at the highest levels in decades as demand for muni-bonds soars.


Ultimately, the vote may amount to little more than a blip for investors facing high taxes and the prospect of changes to the cap on federal state and local deductions on the horizon.

“It has definitely added a different facet to the deal, but when you’re looking at deals that are 10, 20, 30 years in maturity, investors should look long term and be prepared to hold a credit through multiple election cycles,” said Dora Lee, director of research at Belle Haven Investments.
The state is offering investors a yield of 0.08% on bonds due in 2022 with a 5% coupon, and 2.5% on those due in 2051 with a 2.4% coupon, according to a preliminary pricing wire viewed by Bloomberg.

Ten-year California general obligation bonds are trading at yields about 6.8 basis points more than benchmark securities, according to Bloomberg data. That’s slightly higher than the average spread of 5.6 basis points over the last three months, the data shows.

The state’s credit is in “excellent shape, and absent the recall, we think worthy of tights spreads,” wrote John Ceffalio and Patrick Luby, municipal analysts at CreditSights in a report evaluating the bond sale published earlier this month. The state is flush with cash, reporting higher than expected revenue collections and receiving $27 billion from the American Rescue Plan.

Read More: Muni-Bond Buyers Shrug Off California Governor’s Recall Peril

Ceffalio and Luby said that a successful recall could push spreads “modestly” wider as investors fear that the state’s strong governance could slip. They said that some replacement candidates seem “ill-suited and lightly qualified” to manage the state’s budget.

Still, any spread widening could create an opportunity. “In our view, if California credit spreads widen in the aftermath of the election outcome, investors should consider it as a buying opportunity,” wrote Barclays Plc strategists Mikhail Foux, Clare Pickering and Mayur Patel in a Sept. 3 research note.

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