Underwriters reported an unsold balance of $171 million from $1.3 billion California bonds sold yesterday, but the size of the deal depressed secondary prices 1/4 point.

A group led by Merril Lynch & Co. won the issue with a true interest cost of 5.9259%.

A 17-member syndicate led by Lehman Brothers had the only other bid, with a 5.9917%. Bank of America traditionally has filled the spot occupied by Merril Lynch, but rotated out of the position.

Bonds were reoffered to investors at yields ranging from 2.75% in 1993 to 6.30% in 2022. The 2019 maturity contained $104 million of the loan and was priced with a coupon of 6.25% to yield 6.35%.

Market players expected the new 20-year bonds would yield from 6.30% to 6.35%, with another five basis points tacked on as maturities neared 30-years.

The state's bond sale, the largest bonding offering this week, came as it emerges from a tumultuous summer where the fiscal 1993 budget was approved two months late amidst a nagging recession.

A portion of the loan Was insured in the primary, a first for a California GO deal.

The 2005, 2007, 1010, 2014 and 2021 maturities were insured by the Municipal Bond Investors Assurance Corp. and are rated triple-A by Moody's Investors Service and Standard & Poor's Corp.

The remaining maturities are rated Aa by Moody's, A-plus by Standard & Poor's, and AA by Fitch Investors Service.

Dennis J. Boyle, managing director of Merrill's national underwriting desk, said about 50% of the loan was sold to permanent investors and he estimated Street float to be about $415 million.

He added that bonds remained in the 2003, 2006, 2014, 2015, and 2021 maturities, with good retail demand but only "mediocre" crossover buying.

Some Buyers Idle

A small sampling of opinions from mutual funds showed that some institutional investors chose to stay on the sidelines yesterday, citing a concern that the pricing levels were overly aggressive.

"It was a good bid from the issuer's perspective," said one portfolio manager for California tax-exempt bonds.

The investor said, however, that he considered the yields about five to ten basis points too aggressive for his taste, especially given recent trading ranges for existing GOs and the enormous size of yesterday's deal.

The manager added that he wants "to see how the dust settles," especially in regard to how many bonds involved "true investor participation" and how many remained in the hands of dealers.

Another institutional investor placed large pre-sale orders with both accounts, but the winning bid produced yields in which the fund chose not to participate, the portfolio manager said.

The investor added that there "is no scarcity value" in California's name right now, considering that the state will be in the market again soon.

"There's no urgency to buy the first one" out of the gate, he observed.

Some other fund managers echoed that view, believing they can afford to be patient and monitor trading levels in the secondary market before deciding whether to participate in yesterday's deal.

They also noted that more buying opportunities are around the corner, with a California public works issue in the wings and another sizable GO issue expected around Nov. 18.

One investment firm that was seeking GOs in the 10-to-15 year maturity range backed off when those bonds were offered at yields of about 20-to-25 basis points off a triple-A rated credit, a trader at the firm said.

By contrast, the trader said, his firm has acquired GOs in the secondary market at almost twice that spread, so "that's why we didn't participate" in yesterday's deal.

Pricing on the insured bonds "also looked somewhat aggressive," the trader added.

Investors speculated yesterday on potential noninvestment-related reasons, valid or otherwise, why underwriters priced the bonds at such aggressive levels.

Among other things, they observed that dealers want to make a good impression with such an important issuer, and they noted that winning a sizable deal also is a nice boost for firms in the volume rankings.

In response, Boyle noted that some underwriters may opt for aggressive prices for those reasons, but he said [Merrill] did it for the money."

From the issuer's perspective, the state treasurer's office welcomed the results.

Kathleen Brown, the state treasurer, noted in a press release that California achieved the lowest interest rates since 1979 on the deal.

She also touted the bond proceeds as a way to boost the state's beleaguered economy - especially the construction industry - with "our own public works program."

The bond issue primarily will finance schools throughout the state, and the treasurer's office estimated the related construction activity could provide jobs for about 13,000 workers.

Yesterday's issue also marked the state's first GO sale under eased federal guidelines for tracking arbitrage earnings, according to the treasurer.

"All in all, this makes the process easier and cuts down on unnecessary costs." said a spokeswoman for Brown. California can avoid the complexity of older federal rules that forced the state to use interim loans and other more complex monitoring systems for its GO bond proceeds, the spokeswoman added.

Including yesterday's sale, California now has $6.8 billion of authorized but unissued GO bonds on the books. Two GO measures totaling $1.9 billion will appear on the Nov. 3 statewide ballot.

California traditionally sells non-callable long bonds, and securities in 20-years or less retained that feature in yesterday's deal.

But the state also included nearly $350 million of principal distributed in maturities from 21 to 30 years, subject to an optional redemption after 10 years.

Jefferson County Sale

A syndicate led by George K. Baum & Co. as senior manager priced and repriced $328 million general obligation bonds for the Jefferson County, Colo., School District No. R-1.

At the repricing, yields were raised by about three basis points in 2007, one basis point on both a 2012 maturity and a 2007 capital appreciation bond.

The offering included $325 million current interest bonds priced to yield from 3% in 1993 to 6.23% in 2007.

A 2008 maturity, containing $30 million of the loan was not formally reoffered to investors. Term bonds in 2012, totaling $140 million, were priced with a coupon of 6%, to yield 6.38%.

Nearly $3 million capital appreciation bonds were priced to yield 6.35% in 2007.

The issue is insured by the AM-BAC Indemnity Corp. and rated triple-A by Moody's and Standard & Poor's. The deal carries an underlying rating of A by Moody's and AA by Standard & Poor's.

Finally, $132 million Hoboken-Union City-Weehawken Sewerage Authority, N.J., sewer revenue bonds were priced by PaineWebber Inc. as senior manager.

The offering included serial bonds priced at par to yield from 2.75% in 1993 to 5.45% in 2001. A 2012 term was priced as 6s to yield 6.289% and a 2019 term, containing $81 million of the loan, was priced as 6.20s to yield 6.35%. Non-callable capital appreciation bonds were priced to yield from 5.90% in 2002 to 6.40% in 2010.

The issue is MBIA-insured and rated triple-A by Moody's and Standard & Poor's.

Yesterday's Market

Municipal prices ended 1/4 point lower on the day in dull trading, market players said.

Tax-exempts continued to mirror the government market and short and intermediate Treasury bonds suffered losses yesterday.

A lack of a Fed ease, uncertainty over the presidential election, and supply weighed on prices.

Municipal traders noted that the 10 to 12 year range has cheapened over the last several sessions, thanks to increased bid-wanted activity.

In the debt futures market, the December municipal contract settled down 2/32 to 95.18.

The MOB spread jumped, widening to negative 270 from negative 254 Tuesday.

Potentially harmful economic data, meanwhile, proved to be a non-event.

The producer price index for finished goods rose 0.3% in September, following two months of 0.1% increases. Retail sales in September increased a modest 0.3% on across-the-board gains for durable goods.

In secondary dollar bond trading, prices were quoted unchanged to as much as 1/2 point lower.

In late trading, New York City Water and Sewer 6 3/8s of 2022 were quoted at 96 1/4-1/2, to yield approximately 6.66% on the bid-side; Los Angeles Department of Water and Power 6s of 2032 were quoted at 94 1/4-3/4, to yield 6.40%; Washington Public Power Supply System 6 1/2s of 2015 were quoted at 98/1/2-7/8, to yield 6.628%; and Puerto Rico GO 6s of 2014 were quoted at 94 5/8-95, to yield 6.463%.

Illinois Toll Highway Authority 6 3/8s of 2015 were quoted at 97 1/2-98, to yield 6.588%; Denver Airport AMT 6 3/4s of 2022 were quoted at 94 3/4-95 1/4, to yield 7.179%; and Florida Board of Education 6s of 2025 were quoted at 95-1/4, to yield 6.365%.

In the short-term note sector, yields rose five to 15 basis points on the day, traders said.

In late action, Los Angeles Trans were quoted at 2.79% bid, 2.75% offered; New Jersey notes were quoted at 2.83% bid, 2.78% offered; and Texas Trans were quoted at 2.85% bid, 2.80% offered.

An issue of $248 million Connecticut Housing Finance Authority housing mortgage finance program bonds, scheduled for sale yesterday, was postponed, according to First Boston Corp., the senior manager.

An officer with the firm said work on the deal had yet to be completed. The issue could be priced as early as today, he added.

New York City Sonds

Standard & Poor's announced yesterday that it has affirmed its Aminus rating on New York City's general obligation bondse.

The city is selling a total of $1.08 billion of securities next Tuesday.

The rating affects $769 million in GOs scheduled for Tuesday's sale, and $18.3 billion in outstanding debt, Standard & Poor's said.

In announcing the rating, Standard & Poor's said in a press release that the city's rating outlook "is negative, but financial trends appear to be stabilizing."

City officials said yesterday that after a meeting with its underwriters last Friday, the city has decided to include two derivative products in the bond offering.

The city will sell $75 million in taxable variable-rate commercial paper, using Kidder Peabody & Co. as a remarketing agent; and $39 million of indexed floating-rate bonds. First Boston Corp. was tapped to underwrite the floating rate bonds, which mature in 2016.

Market sources speculated the yield on the long-term GO bonds could reach 7% to 7.05%. A trader said New York City uninsured long term-bonds yesterday traded at a yield of 6.98%.

Charles Gasparino contributed to this column.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.