Money & Company
Tracking the market and economic trends that shape your finances.
October 19, 2011 | 4:29 pm

California was forced to boost interest rates on a sale of $1.8 billion in tax-free muni bonds Wednesday, as institutional investors demanded higher yields to close the deal.

The state set a yield of 3.70% on the 10-year bonds in the offering, up from a preliminary estimate of 3.51% on Monday. The five-year bonds in the sale will pay a yield of 2.28%, up from an initial estimate of 2.10%. The bonds were sold in maturities of three to 30 years, with the longest-term issue yielding 5.03%.

Interest on the bonds is exempt from state and federal income taxes for California residents. The proceeds from the sale will fund voter-approved infrastructure projects.

Treasurer Bill Lockyer had to pay higher yields after the bonds got a lukewarm reception from individual investors Monday and Tuesday. Those investors put in orders for $387 million of the debt, or about 21.5% of the total.

By contrast, individual investors ordered almost 28% of the $2.37-billion bond offering the state sold Sept. 20. And at the sale before that, in November, individuals sought nearly 80% of the deal — when yields were substantially higher. The 10-year bonds in that offering paid 4.23%.

The relatively low demand from individuals this time around meant that institutional investors, such as mutual funds, had more leverage to push for higher returns when the state took their orders Wednesday. That will benefit individuals who ordered the bonds Monday and Tuesday, because all buyers get the same final yields.

It also means taxpayers will foot a bigger bill for interest costs than Lockyer had hoped.

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