Several of my colleagues at work have parked their savings in Money Market funds and bank CDs. This morning, we heard from NPR that California Governor Arnold Schwarzenegger was urging consumers to purchase California bonds. They even set up a web site to sell California bonds. As part of our water cooler discussion, we wondered whether we should purchase some California bond.
Here are my thoughts about California bond and the State of California:
- State of California is having a major financial crisis. The state might need an emergency loan of as much as $7 billion from the Federal government within weeks.
- Due to the current financial crisis, California is unable to sell infrastructure bonds and short-term securities that are necessary to meet the state’s cash-flow needs
- The yield is about 4-6%. Although the California bond is federal and state tax exempt, the yield is pretty low given the risk. The State of California is basically insolvent.
- Earlier this year, the City of Vallejo in Northern California filed bankruptcy . Although the Federal government is likely to step in and help State of California, it’s not inconceivable that California files for bankruptcy.
Also, it’s a little bit desperate move by Arnold to pitch consumers — if the institutional money is not going to California bond, why should we consumers take the risk?
My conclusion is that I will not be investing in California bond. Would you buy California bond?