California: the queen of borrowers

August 30, 2011

California is the queen of U.S. states given her size, wealth and desirability. Her economy is the eighth largest in the world and, as of 2008, the gross state product (GSP) was about $1.85 trillion, or approximately 13 percent of the country’s gross domestic product (GDP). It makes sense that she is the largest municipal bond issuer given her population, geographic size and infrastructure needs. California dominates muniland on many levels.

Although California has a large and powerful economy, she also has a history of more dynamic economic swings than the rest of the nation. I’m not sure where the volatility comes from but I thought the comparison between the U.S. unemployment rate to the rate of joblessness in California over several economic cycles was interesting. In 2010 California’s rate was 12.4% while the national rate was 9.6% (data provided by the California Department of Finance). There are substantial regional weaknesses in the Golden State.

The Treasurer of California, Bill Lockyer, keeps track of the state’s borrowing and provides the graph below showing that $71 billion of general obligation bonds have been issued. The state legislature has set a debt ceiling of $150 billion and it’s likely that the Treasurer will be coming to the municipal bond market to issue more bonds soon. In July he borrowed $5.4 billion through a bridge loan from Wall Street banks to tide the state through the turmoil of the U.S. Congress raising the federal debt ceiling. Market talk is that he will borrow approximately $11 billion in the fall to repay the short-term bridge loan and fund additional infrastructure projects. The Golden State issued $10.5bln of general obligation bonds during 2010.

My Thomson Reuters colleague, Dan Berger of Municipal Market Data, sent over the graph below which shows what happens to the price of California general obligation bonds as new bonds are issued. You can see the additional yield that must be paid on the bonds rises every August after more bonds were put into the market. The additional supply lowered the price of the bonds and made the yield go up. This is a good example of the dance all issuers play as they try not to flood the market with paper and raise their borrowing costs.

California is the queen of borrowers and even though she is suffering economic woes, I’m sure we will see her in the municipal bond market soon. Stay tuned.

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