Stem cell bonds draw individuals

Individual investors bought 41% of California’s first bond issue to fund medical research using embryonic stem cells, triple the amount the state expected, Treasurer Bill Lockyer said Thursday.

Individuals put in orders for $102.8 million of the bonds. Institutional investors including mutual funds and banks bought the balance of the $250-million deal.

The bonds, which the state plans to repurchase from investors in April 2010, have an annualized interest yield of 5.17%.

That made them attractive to investors hunting for relatively low-risk securities. By contrast, three-year U.S. Treasury notes yield 4.01%.

The bonds are general obligation issues, but unlike most state bonds, their interest will be subject to federal income tax, according to the prospectus for the offering. That’s because the state still has to get IRS approval for tax exemption on the securities.

The interest won’t be subject to California income tax.

The deal is the first bond sale under Proposition 71, which voters approved in 2004. The measure authorized the state to issue $3 billion in bonds to fund grants for stem-cell research.

Because embryonic stem cells can be grown into any type of cell in the body, some scientists believe they could lead to treatments and cures for diseases. But the research is controversial because the cells are extracted from embryos produced during in-vitro fertilization.