Oct. 6 (Bloomberg) -- Massachusetts plans to sell $750 million in short-term notes this week, leading state and local governments seeking to revive debt sales after financial turmoil inhibited their ability to borrow since mid-September.

Massachusetts approached the U.S. Treasury about possible financing if it can't raise the money from private investors. California, seeking to borrow $7 billion next week, also has communicated with federal authorities, with officials saying they may run out of cash by month-end without the funding.

``We are looking to go into the market tomorrow, and if there is no response or if it's extraordinarily expensive, we will postpone that borrowing,'' State Treasurer Timothy Cahill said in a CNBC interview today.

Cahill, noting his state's cash situation ``isn't dire,'' said he explored the option of federal help before Congress passed a $700 billion financial bailout. ``We want to know what kind of options that we might have,'' Cahill said.

Borrowers in the $2.66 trillion municipal debt market have struggled to raise money since Lehman Brothers Holdings Inc. declared bankruptcy Sept. 15. Issuers have postponed more than $12 billion in bond and note sales, Bloomberg data show.

Sales of fixed-rate bonds plummeted to about $800 million each of the past two weeks, after averaging more than $6 billion weekly this year, based on data compiled by Bloomberg. The lack of issuance contributed to three weeks of rising borrowing costs by making it harder to gauge market values, according to George Friedlander, municipal strategist at Citigroup Inc.

`So Few Issues'

``With so few issues being placed successfully, traders and institutional buyers are backing off their bids to incorporate an extra premium, because they cannot pinpoint the worth of a given bond,'' Friedlander said in a weekly report from New York. ``The muni market tends to struggle when very limited successful new issue supply leads to weak `price discovery.''

Massachusetts tomorrow will take bids from investment banks seeking to underwrite a deal that would boost the state's cash flow until more tax revenue arrives this fiscal year. The offering was previously set for Oct. 2.

Municipal bonds were little changed today, weakening relative to Treasuries' gains.

Yields on top-rated AAA general obligation bonds due in 30 years held steady at 5.35 percent, 53 basis points higher than a recent low on Sept. 11, based on a daily index from Municipal Market Advisors. On a relative basis, the 30-year tax-exempt index reached a record 135 basis points over the taxable Treasury benchmark. A basis point is 0.01 percentage point.

Rising Cost

The average cost for states and municipalities to borrow for a year have risen 83 basis points in two weeks, to 2.44 percent, according to a weekly Bond Buyer index. That's the highest relative to the Federal Reserve's benchmark for overnight bank borrowing in more than four years.

Massachusetts plans to sell $375 million of notes due in April 2009, and another $375 million set to mature in May. The revenue anticipation notes carry the general obligation backing of Massachusetts, which has the highest ratio of debt per capita among U.S. states.

The notes may yield 2.5 percent, based on preliminary estimates, said Joseph Lynagh, a portfolio manager at T. Rowe Price Group Inc. in Baltimore, who helps manage more than $2 billion in tax-exempt assets.

Kentucky, Maine

Among the largest long-term offerings set for this week, Kentucky plans to sell $340 million of revenue bonds to fund capital projects and refinance debt through Morgan Stanley.

The state wants to finance a dam near Lexington, a new indoor arena at the Kentucky Horse Park, science and health research facilities at the University of Louisville and Western Kentucky University, and various infrastructure projects for economic development.

Maine Municipal Bond Bank moved forward today with a $100 million bond offering. Wachovia Corp. led underwriters that began collecting orders from individual investors last week.

All but about $7 million went to ``retail'' buyers, with the rest going to institutional investors, said Robert Lenna, executive director of the agency, which borrows on behalf of localities in the state.

``We are still moderately chaotic out there,'' Lenna said. ``It all sort of came together to work.''

Yields ranged from 2.38 percent on bonds due in November 2009 to 5.53 percent on debt set to mature in 30 years. Twenty- year securities were priced to yield 5.43 percent, 28 basis points more than Municipal Market Advisors' top-rated scale.

The bonds are rated AAA by Standard & Poor's and Aa1 by Moody's Investors Service. The proceeds will fund projects for 17 local governments in Maine.

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

Last Updated: October 6, 2008 16:36 EDT