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State nets lower
interest rates in
strong bond sale

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Bloomberg News

A sale of $150 million of Hawaii general obligation bonds attracted enough investors to let underwriters raise prices on some maturities, a week after Moody's Investors Service raised the state's rating.

Prices on Hawaii bonds with maturities from 11 years through 20 years were raised slightly from yesterday's initial levels. That gave the state lower interest rates, which move in the opposite direction of bond prices. The yield on the 20-year bond was reset to 5.64 percent from 5.67 percent yesterday. Salomon Smith Barney Inc., which headed the underwriters handling the sale, dropped the 15-year yield to 5.35 percent from 5.4 percent.

Hawaii's bonds also tend to attract buyers because there aren't many debt sales in the state, one investor said.

The state "doesn't really come with that much issuance," said Philip Fang, who helps manage about $70 million in the Lord Abbett Hawaii Tax-Free Income Fund.

Yesterday's sale was the second largest in Hawaii this year, according to Bloomberg records. Hawaii and its local governments have brought 11 tax-exempt issues to the market this year, compared with 592 in California, Bloomberg statistics show.

Last week's upgrade also was a plus, Fang said, and the bond issue is insured against default, making it "AAA."

"We thought it was extremely attractive," said Fang, who bought some of the 20-year bonds for his fund. The 5.64 percent yield on those bonds compares with 5.59 percent on a 20-year insured general obligation and an "Aa3" state general obligation, according to Bloomberg Fair Value.

That 5.64 percent also provides a taxable equivalent yield of 10.23 percent for a Hawaii resident in the top federal and state income tax brackets.

Moody's last week raised its rating on Hawaii's general obligation bonds to "Aa3" from "A1." Moody's credited the state's improving economy. Standard & Poor's said last week it might raise its Hawaii rating, now "A+," also citing economic improvement.