Market votes on California.

In their first post-election test, California bond prices held steady despite concern that Gov.-elect Arnold Schwarzenegger will be unable to reduce an $8 billion deficit because of opposition from state lawmakers and his promise to reduce a car registration fee.

"There's been no surge in bids wanted," said Stephen Kelleher, head of the California municipal bond department of RBC Dain Rauscher, on Oct. 8, the first day of trading after the election. "We still have more people interested in acquiring California G.O.s (general obligation bonds) than we have sellers."

Some investors are concerned that Schwarzenegger's pledge to reduce a car tax that generates $4 billion in revenue will widen next year's projected budget deficit. That would push up bond yields, increasing the cost to the state of raising $13 billion through a planned debt offering.

"What would hurt California bonds is if there is an irresponsible plan put forward that in fact widens the fiscal gap," state Treasurer Philip Angelides, a Democrat, told Bloomberg News. Angelides said he doubts Schwarzenegger has "been wholly truthful about what it will take to repair the fiscal damage. He needs to be held accountable for that."

In the weeks leading up to Oct. 7 election, concern about the fiscal shortfall caused the yield premium that the state pays to borrow to widen.

California's benchmark 5.25 percent bonds maturing in 30 years yielded 5.31 percent last week, or 50 basis points more than AAA-rated municipal debt. Last month, the securities yielded 40 basis points more than AAA debt and a year ago the yield spread was about 20 basis points.

"The recall was just a distraction and gave people who wanted to sit on the sidelines an excuse," said Bud Byrnes, chief executive of RH Investment Corp., a Los Angeles-based municipal bond broker. "The election was a non-event for the market, which is driven by supply and demand."

California's bond prices fell during the past two weeks amid a surge in sales, including $2.6 billion in bonds offered last month and $1.5 billion in general obligation debt planned in two weeks.

Some market participants expect California bond prices to rise over the next two weeks on relief that the election to recall Gov. Gray Davis has been resolved. However, the boost may be short-lived.

Getting the election over means "a sigh of relief," said Bernie Schroer, who helps oversee the $14 billion Franklin California Tax-Free Income Fund, the largest municipal bond fund in the U.S. "Everybody's going to be happy for the circus to come to a halt."

--Bloomberg News