California’s cash crisis is causing investors to back away from its short-term debt, which is increasing the state’s borrowing costs at a time it can ill afford it.
In the most striking example, the tax-free yield on California’s commercial paper – which is ultra-short-term debt that generally matures in seven to 30 days – has skyrocketed in the past month. The annual yield on seven-day paper has risen from 3.37 percent on June 2 to 8.12 percent on July 2.
By comparison, most highly rated tax-exempt commercial paper is yielding around 0.3 to 0.5 percent, says John Carbone, a principal with Vanguard who manages two California municipal bond funds.
California’s commercial paper rate is soaring in part because money market funds, which are traditionally big buyers of commercial paper, have become unable or unwilling (depending on whom you talk to) to buy California’s paper.
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