Oct. 9 (Bloomberg) -- California Treasurer Bill Lockyer said the lowest-rated, most-populous U.S. state may sell as much as $15 billion of bonds over the next nine months to refinance debts and fund public works projects.

California may offer $4 billion of debt during the week of Oct. 26 to refinance the bonds used by Governor Arnold Schwarzenegger to cover previous budget deficits. The budget enacted in July would allow the sale of as much as $11 billion more of general obligation bonds through the June 30 end of the fiscal year if financial markets allow, Lockyer said. The exact amount of a sale hasn’t been decided.

“If the market is inhospitable, we won’t go,” Lockyer said in an interview. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.”

Lockyer’s spoke before Controller John Chiang said state general fund revenue fell $1.1 billion below estimates during the first three months of the fiscal year that began July 1. Governor Arnold Schwarzenegger signed the budget on July 28 after the Legislature closed a $24 billion deficit.

Additional bond sales by California, the largest municipal borrower, would follow an offering of $4.1 billion of general obligation bonds this week. The state was forced to scale back the size of the deal by some $400 million as benchmark yields for state and local government debt rose the most in almost four months, retreating after a rally in the tax-exempt market last week pushed them to a 42-year low.

U.S. Treasuries also fell, sending two-year notes toward their first weekly loss since September as Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to tighten monetary policy once the outlook for the economy improves.

‘Bad Week’

“It turned into a bad week for bonds,” Lockyer said. “This seemed to be a very hard week with some headwinds for issuers.”

California, a state that’s among the hardest hit by the recession, had already issued $22 billion of debt since March, including $8.8 billion of notes that provided the state with an advance on taxes collected next year.

Lockyer said California still has room to borrow. The state could have sold the entire $4.5 billion bond issue it planned this week were it willing to offer a higher interest rate, which he said he didn’t want to do.

Even after increasing what would pay, California still borrowed more cheaply than it did during previous offerings. A taxable California bond maturing in 2039 yielded 7.23 percent this week, down from a yield of 7.43 percent during a sale in April.

“Everybody thinks there’s still an appetite for California bonds,” Lockyer said. “There’s certainly a continuing need for long-term investments in schools, high speed rail, stem cell research centers and so on.”

To contact the reporter on this story: William Selway in San Francisco at wselway@bloomberg.net.

Last Updated: October 9, 2009 17:24 EDT