Oct. 27 (Bloomberg) -- U.S. state and local governments led by New York City plan to sell about $5 billion of fixed-rate bonds for a second week, after a record rally cut long-term benchmark borrowing costs by more than half a percentage point.

New York's Transitional Finance Authority set its second offering of state-aid-backed bonds for city schools in five weeks, after last week's rebound in municipal securities. The ``adequately improved'' market also led the Long Island Power Authority to plan a roughly $370 million debt sale for early this week that would complete a borrowing plan scaled back by the turmoil three weeks ago, Fitch Ratings said in a release.

Individual and institutional investors seeking alternatives to slumping stocks and yields higher than Treasuries sent tax- exempt bonds soaring 6.3 percent last week, according to Merrill Lynch & Co.'s total-return Municipal Master Index. The $5 billion of long-term issuance represented the most sales in six weeks, data compiled by Bloomberg show.

``The calendar is rapidly growing and will be very heavy for the remainder of this year if liquidity improves,'' Phil Fischer, municipal strategist at Merrill in New York, said in a report today.

The market for new municipal bond issues all but seized up in mid-September as rising borrowing costs and lack of support from institutional investors prompted borrowers to delay deals, some of which may be revived in coming weeks.

Historic Moves

Yields on 30-year AAA bonds, which reached all-time highs above taxable Treasuries at mid-month, fell 53 basis points to 5.46 percent, according to a daily index from Municipal Market Advisors. A basis point equals 0.01 percentage point.

The improvement likely beat out ``any other week in the market's modern history,'' according to a note on the Concord, Massachusetts-based research firm's Web site.

Tax-exempt securities still offered about 134 percent of the yield available on 30-year Treasuries, compared with a record 143 percent Oct. 15. State and local bonds had normally yielded less than U.S. debt because of the tax breaks.

Municipal bond sales for the year through early September rivaled 2007's record pace. After the latest round of Wall Street tumult, overall issuance for 2008 was down almost 9 percent to $328.3 billion through the end of last week, based on preliminary Thomson Reuters data cited by Merrill.

Highly rated general obligation bonds have performed better than debt backed by dedicated revenue streams amid concerns a weakening economy will weigh more on lower-rated credit.

The yield gap between weekly Bond Buyer indexes tracking 20 general obligation bonds and 25 revenue securities -- a proxy for credit spreads -- widened to 74 basis points. That's 1 basis point less than the 20-year high reached in 2005.

``Rising unemployment and falling consumer spending are generating less income and sales tax revenues than states expected when they balanced their budgets several months ago,'' Fischer said. ``It is likely that some states will experience some level of credit erosion.''

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

Last Updated: October 27, 2008 09:50 EDT