By Michael B. Marois and Paul Dobson March 31 (Bloomberg) — The bond market is showing California is no Greece. Debt issued by California, the world’s eighth-largest economy, is outperforming Greece’s bonds as funds including Cumberland Advisors say investors are betting the lowest-rated U.S. state’s credit risk has been exaggerated. The cost to protect against California not paying its obligations is the lowest relative to Greece in at least 15 months, according to data compiled by Bloomberg. Greece, with the European Union’s largest budget deficit and an economy one-fifth California’s in size, is grappling with a debt crisis that’s resulting in skyrocketing borrowing costs. The yield on the 10-year Greek bond rose to 7.16 percent on Jan. 28, the highest since October 1999, prompting European leaders to pledge aid to the nation. Even with an $18 billion budget gap expected over the next 15 months, California sold $3.4 billion in taxable debt last week at its lowest costs since November as overseas buyers purchased 30 percent of the debt. “Investors are voting with their feet and they are coming to America,” said Peter Demirali , the head of the fixed-income department at Cumberland Advisors in Vineland, New Jersey, which manages $1.4 billion. “They are saying that they will lend a billion dollars to California, no problem.” California’s constitution gives debt service priority on the $88 billion general fund, second only to education. The state has never missed a bond payment. Debt service as a ratio of the general fund is 6.7 percent, according to Treasurer Bill Lockyer . “It’s interesting that there is this Greece analogy around, which I think is far too apocalyptic for the facts,” Lockyer said March 30 in a Bloomberg Television interview. “As sovereign entities go, our debt is rather modest, so it seems to be an unfair comparison that creates doubts with investors.” Libor Rises Elsewhere in credit markets, the cost of borrowing in dollars between banks climbed to a six-month high for a fifth day as the Federal Reserve prepared to end its debt-buying program designed to limit the fallout from the recession. National Semiconductor Corp. , the maker of chips that control power in electronic devices, sold $250 million of bonds in its first issue since June 2007. Dubai International Capital LLC , the fund owned by Dubai’s ruler, plans to sell debt for the cash it needs to prevent Oaktree Capital Management LLC from seizing its Almatis unit. The London interbank offered rate , or Libor, that banks say they charge each other for three-month loans rose to 0.292 percent today, the most since Sept. 17, from 0.291 percent yesterday, according to the British Bankers’ Association. Libor, a benchmark for about $360 trillion of financial products around the world, advanced for the 20th consecutive day. Mortgage-Backed Securities The Fed expects to complete its $1.43 trillion in purchases of mortgage-backed securities and housing-agency debt this month as it phases out emergency measures taken to thaw credit markets. Three-month dollar Libor climbed to 4.82 percent on Oct. 10, 2008, in the wake of Lehman Brothers Holdings Inc.’s bankruptcy a month earlier. National Semiconductor’s 3.95 percent notes due in 2015 priced to yield 165 basis points more than similar-maturity Treasuries. In its last offering of five-year debt, the Santa Clara, California-based company’s 6.15 percent notes paid a spread of 98 basis points. A basis point is 0.01 percentage point. Dubai plans to repay senior lenders to the German alumina- products maker through a sale of between $600 million and $700 million of high-yield bonds, two people familiar with the situation said. Dubai is seeking to issue between $600 million and $700 million of senior and subordinated bonds in Frankfurt- based Almatis, which breached terms of the loans in first half of last year as the global economic slowdown hurt demand for its goods. Bondholder Protection A benchmark indicator of U.S. corporate credit risk rose. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 1.9 basis points to a 88.2 basis points, CMA DataVision prices show. The index, which typically increases as investor confidence deteriorates and falls as it improves, dropped 3.3 basis points in March, the second straight monthly decline. In London, the Markit iTraxx Europe Index, which investors use to speculate on creditworthiness or to hedge against losses on 125 investment-grade companies, rose 1 basis point to 78.5 basis points, according to JPMorgan Chase & Co. Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 annually on a contract protecting $10 million of debt for five years. Budget Deficits Traders in the derivatives are demanding 141 basis points more to protect against the bonds of Greece than they are for California’s, the widest difference since at least June 2008, according to CMA. On average during that period, California traded 65 basis points wider than Greece. The average yield on a seven-year taxable California bond sold March 25 declined 18 basis points to 5.44 percent as of March 30, Bloomberg data show. Yields on seven-year notes sold by the Greek government this week have risen to 6.4 percent, up from 6 percent when the debt was issued on March 29, according to Royal Bank of Scotland Group Plc prices on Bloomberg. California’s $18.6 billion deficit is about 1 percent of the state’s $1.8 trillion gross state product , while Greece’s budget deficit equals 12.7 percent of its gross domestic product, the biggest in the euro region. Greece Rated Higher California’s outstanding tax-supported debt , about $71 billion, is less than 4 percent of the state’s gross domestic product. Greece’s debt to GDP ratio is forecast to reach 120 percent in 2010, according to government figures. Moody’s Investors Service rates California’s debt Baa1, its third-lowest level of investment grade, while Greece is ranked two steps higher at A2. Speculation that investor concern may spread to other nations caused the euro to weaken this year and highlighted tensions between leaders of European nations as they negotiated a way to save the southern European nation from default. Greece’s quandary drew attention to a currency swap organized by Goldman Sachs Group Inc. in 2002 to hide the extent of its deficit and debt. Franco-German Proposal Greek government bonds were the worst-performing sovereign securities in the euro area in the first quarter, handing investors a 1.5 percent loss, according to Bloomberg/EFFAS indexes. Prime Minister George Papandreou is battling to convince investors the nation is able to control its deficit, which at 12.7 percent of GDP is the biggest in the region. The yield on the 10-year Greek bond rose to 7.16 percent on Jan. 28, the highest since October 1999. European leaders endorsed a Franco-German proposal for a mix of International Monetary Fund and bilateral loans at market interest rates to help Greece on March 25, providing it with a back-up in the event it fails to contain its debt. Greece may pay about 13 billion euros more in interest over the lifetime of the debt it sells this year than it would have to had yields stayed at their pre-crisis levels relative to Germany’s, according to Bloomberg calculations, using data provided by Credit Agricole Corporate and Investment Bank. “Greece needs to get through its current funding and start growing at a decent rate so this large amount of debt doesn’t snowball,” said Peter Chatwell , a fixed-income strategist at Credit Agricole CIB in London. “The market is currently reflecting disappointment that the seven-year deal didn’t outperform.” To contact the reporters on this story: Michael Marois in Sacramento at mmarois@bloomberg.net ; Paul Dobson in London at pdobson2@bloomberg.net
