Explaining Southern California's economy

California's debt crisis: We'll figure something out

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The California State flag.

California just kicked off a $2 billion municipal bond offering that will run through tomorrow. So far, it's looking pretty solid, according to the Wall Street Journal/Dow Jones Newswires, with $550 million sold so far to retail investors. Institutional investors will get their shot later this week. 

The bond sale highlights the paradox of the Golden State:

California's bond offering comes after Standard & Poor's sweetened its outlook on the state to positive from stable earlier this month. At the time, the ratings agency said it could upgrade the Golden State, depending on its ability to better align its cash performance and budget assumptions.

California is "the most heavily indebted state, but it also has the biggest economy," said Paul Montaquila, vice president of fixed-income trading at San Francisco-based Bank of the West, whose capital markets group has $10 billion of total assets under management. "For as bad as things may seem to be, the state always figures something out."

Montaquila said his firm's clients, which range from ultra high-net-worth individuals to mid-tier corporations, placed an order for California bonds. He added that the state's debt offered better yields than other similarly maturing fixed-income assets, like Treasurys.

He's right about that. The yield on 10-year debt is 2.70 percent. The yield on 10-year U.S. Treasury debt, by contrast, is a paltry 1.94 percent. Seventy-six basis points isn't a bad spread, when you consider the California probably will figure out how to repair its beleaguered budget, through a combination of cuts and higher taxes.

That said, given the kind of shape the state is in, being able to borrow for a decade at less than 3 percent is a definite sign of hope.

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