Oct. 14 (Bloomberg) -- California sold almost half of the $4 billion of notes it is offering this week to avert a cash shortage, with tentative yields as much as 1.1 percentage points higher than last year.

Notes due May 20, 2009, may offer a yield of 3.75 percent to 4 percent and debt to be paid off June 22 might yield 4.25 percent to 4.50 percent, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer, in an e-mail. The state sold $7 billion of notes last year at 3.37 percent.

California, home of the world's eighth-largest economy, is seeking to raise cash to pay bills until tax revenue arrives later in the year. The state is pressing forward, even as rising costs drive borrowers, including New York City and Ohio, to defer long-term bond sales. Standard & Poor's last week threatened to lower the state's credit rating if the sale falters amid a freeze in the bond market.

``It's about being able to sell it,'' said Matt Fabian, managing director at Concord, Massachusetts-based research firm Municipal Market Advisors. ``Everyone is paying higher yields to get their deals done.''

The yields are still a quarter-percentage point lower than previous preliminary yields underwriters suggested might be necessary to find buyers for the notes as the credit crisis saps investor demand.

`Good Indication'

That's ``perhaps a good indication that there is interest,'' said Mark McCray, a managing director and municipal bond fund manager at Newport Beach, California-based Pacific Investment Management Co.

The notes may yield as much as 3 percentage points more then the U.S. Federal Reserve's target rate for overnight bank lending; last year, the state paid 1.38 percentage points less.

Bank of America Corp. and Goldman Sachs Group Inc. are leading a group of investment banks taking orders from individuals today and tomorrow, with final pricing set for Oct. 16 when institutions such as funds and insurers place orders.

During the first day of the so-called retail order period, individual investors said they wanted to buy more than $327.4 million of the May notes and almost $1.5 billion of the June notes, Dresslar said.

The preliminary tally of $1.837 billion represents 45.9 percent of the deal. Last year, California collected $1.65 billion, or 23.5 percent, of the note sale during a three-day retail period.

Schwarzenegger Buys

California Governor Arnold Schwarzenegger, who appeared in radio advertisements pitching the bonds to state residents, said he bought some. He didn't say how much he purchased.

``It's clear that the first day of note sales to Californians has gone extremely well and exceeded expectations, Schwarzenegger said. ``These are good, safe investments that will help protect vital state services.''

California's notes this year carry ratings of MIG1 from Moody's Investors Service, the highest possible. S&P and Fitch Ratings assigned their second-highest short-term ratings of SP1 and F1, down from SP1+ and F1+ last year.

S&P placed California's long-term general obligation rating of A+ under review for possible downgrade Oct. 10, citing ``concerns over the ability of the state, as a result of recent market conditions, to successfully access the short-term market to meet its pressing cash flow needs.''

The state, the biggest borrower in the municipal-bond market, has $51 billion in general-obligation debt outstanding and is rated A+ by Fitch Ratings and a comparable A1 by Moody's Investors Service.

Schwarzenegger two weeks ago told the U.S. Treasury his and other states may need emergency federal loans if they aren't able to tap the debt market. Last week, the Republican governor said the need had lessened.

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

Last Updated: October 14, 2008 20:44 EDT