California bond-selling off to good start

California bonds went on sale yesterday and so far, they're a hit. The state sold nearly two billion in short-term notes. That's nearly half of what the state was offering and those bonds were gone in the first day. California hopes to raise a total of $4 billion from the sale. That's cash the state government needs to pay bills until tax revenue starts rolling in next spring. KPCC's Julie Small reports.

Julie Small: If you go by just the prospectus, the California bonds look like a pretty good deal. By the start of next summer, they'll pay between 3-and-three-quarters percent and 4-and-a-half percent interest, and that interest is exempt from state and federal taxes. Governor Schwarzenegger's radio ads touting the bonds started running last week.

Governor Arnold Schwarzenegger: Those of us who are lucky enough to call California home know that our state is a great asset that belongs to all of us.

Small: California hoped the combination of low risk and relatively high returns would coax investors back into what's been a frozen bond market. Earlier this month, states that wanted to sell bonds discovered no one was buying. Scott Pattison with the National Association of State Budget Officers says that was a shock.

Scott Pattison: For as long as anyone can remember, the credit markets have been fine for the states. They go out on the market to routinely borrow for short-term cash flow needs, or they borrow for the long term for things like bridges, and roads, and university buildings.

Small: But things started looking up last week when Massachusetts managed to sell $750 million in short-term bonds. Now it's California's turn with a bond sale that's more than five times bigger. Just before the sale began, Ben Watkins, who directs bond sales for the state of Florida, thought California could pull it off.

Ben Watkins: Given the volatility in the stock market, and the losses people have suffered, if I were an investor, I would be looking for safety and security in terms of my investment portfolio. And so, from that perspective, municipal bonds represent a great buying opportunity

Small: Watkins says California's high income tax rate makes tax-free bonds even more appealing. That may be why the state gave the first bite of the apple to individual investors like you. You can buy now, and if you do, you'll avoid paying a commission. The state won't take bids from institutional investors until Thursday.