Nov. 3 (Bloomberg) -- California sold $908 million of Build America Bonds today, boosting by 21 percent an offering that the state said yesterday was prompted by an investor request to create a new issue of its taxable debt.

The 30-year, 7.35 percent securities were priced to yield 7.26 percent. That’s 300 basis points, or 3 percentage points, more than comparable-maturity U.S. Treasuries. The U.S. government will pay 35 percent of the interest, bringing the cost to California lower to about 4.7 percent.

California responded to a so-called reverse inquiry that is more common for corporate issues than for municipals. Investors such as life insurers and taxable-bond funds have been drawn to the almost $8 billion in Build America issues brought to market by the state at higher yields and longer terms than similarly rated company debt.

“It’s a good sign of investor demand generally for the state,” said Matt Fabian, senior analyst and managing director for Concord, Massachusetts-based independent research firm Municipal Market Advisors. “Despite all of its credit and supply issues, there’s at least one buyer” with a “sizeable” appetite for its bonds, he said.

The 300 basis-point spread paid by the U.S. state with the most people and lowest credit ratings compares with corporate bonds rated BBB and A due in 15 years or more paying 219 basis points more than benchmarks on a Merrill Lynch index.

California, which already intended to sell $1.5 billion of tax-exempt debt by tomorrow, announced plans yesterday to add the taxable issue of about $750 million to its borrowing plans, with a deal handled by Citigroup Inc.

$750 Million Buy

The buyer who prompted the issue bought $750 million, and the state sold the balance to other investors, according to an e-mail today from Tom Dresslar, spokesman for State Treasurer Bill Lockyer. Neither the state nor the New York-based bank identified the investor behind the reverse inquiry.

“Reverse inquiry is much more common in taxables,” Fabian said in an interview. “It doesn’t happen a lot in munis.”

Municipal issuers have sold more than $47 billion in Build America Bonds to finance infrastructure since April under the Obama administration’s stimulus program, according to data compiled by Bloomberg. The program is set to end before 2011.

California, whose economy is bigger than all except seven world nations, may sell as much as $15 billion in bonds by July to fund public infrastructure or refinance debt, Lockyer said last month. The state’s general pledge to meet its obligations to bondholders is rated BBB by Fitch Ratings, Baa1 by Moody’s Investors Service and A by Standard & Poor’s, the second-, third- and fifth-lowest investment grades, respectively.

Different Dynamics

The taxable deal from California didn’t produce “any significant reaction” in the tax-exempt market, said Dan Solender, who oversees about $12.3 billion as director of municipal bond management at Lord Abbett & Co. in Jersey City, New Jersey, in an e-mail. “Other than the BABs being the same credits, the BAB market operates on different supply and demand dynamics and moves at a different pace,” Solender said.

Yields on benchmark 30-year tax-exempt bonds slid 1 basis point to 5.02 percent today, according to a daily survey by Municipal Market Advisors. The index reached a two-month high of 5.03 percent last week and matched it yesterday.

Puerto Rico sold $372.3 million of tax-exempt bonds rated at the lowest investment grades today to restructure a portion of the U.S. commonwealth’s debt. Interest rates ranged from 5.875 percent on 2036 bonds that can be bought back at face value beginning in five years to 6 percent on 30-year securities callable at par in 2019.

Cal Tax-Exempts

In California’s tax-exempt offering this week, individual investors were given the chance to buy as much as $100 million of 25-year bonds today at an estimated 5.5 percent yield, Dresslar said in a separate e-mail late yesterday. A Bloomberg index to gauge the fair value of similar bonds showed a yield of 5.28 percent. Institutional investors will be offered California debt set to mature in 2035 and 2039 tomorrow, Dresslar said.

A group of investment banks led by De La Rosa & Co., Stone & Youngberg LLC and Siebert Brandford Shank & Co. are marketing the tax-exempt deal.

New municipal issues have carried payouts as much as 20 basis points higher than yields on similar securities trading among investors as bond dealers seek to avoid getting stuck with unsold debt, according to an Oct. 30 report from Morgan Stanley Smith Barney in New York.

To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net

Last Updated: November 3, 2009 15:55 EST