The State of California issued approximately $450 Million of California Veterans General Obligation Bonds last week. Bond proceeds are intended to benefit California military veterans by financing home and farm mortgage loans. Mortgage payments will be used to repay the bonds. The credit strength of the bonds is determined by the stability of the mortgage program. The mortgage portfolio is diversified with loans originated across the state, benefiting from increasing home values and delinquency rates that have fallen below their long-term average.
While the mortgage payments are protected from impacts of the state budget process, the credit quality of the bonds is enhanced by the General Obligation backing of the state. Ironically, the double barrel backing of the bonds provides ratings (Aa2/AA/AA-) that are one notch higher than the state’s G.O. rating, though comparable yields on the Veterans General Obligation bonds were about 25-35 basis points higher than yields on the state’s General Obligation Bonds in the 5-10 year part of the curve. The yields on the longer dated Cal Vet G.O.’s were also higher than comparable housing revenue bonds by 5-10 basis points.