Nov. 17 (Bloomberg) -- Municipal bond yields fell the most in two months as the New York State Urban Development Corp. agency sold more tax-exempt and less taxable Build America debt than planned and obtained yields below yesterday’s estimates.

The $1.47 billion offering, backed by revenue from New York state’s personal income tax, comprised 46 percent of tax-exempt bonds, 39 percent of 30-year Build America Bonds and 15 percent of non-subsidized taxable notes. Ten-year tax-exempt bonds were priced to yield 3.44 percent, down from a preliminary 3.46 percent yesterday.

The market for state and local government debt is moving into a period around year-end when typically new issues drop and money available to reinvest from bond payments rises, said Tom Boylen, a managing director and municipal-bond trader at BMO Capital Markets in Chicago.

Yields on benchmark 10-year general obligation bonds fell 3 basis points, the most since Sept 17, to 3.11 percent today, according to a daily survey by Municipal Market Advisors of Concord, Massachusetts. A basis point is 0.01 percentage point.

Bonds also gained on a strong reception for the $94.5 million in AAA bonds that Howard County, Maryland, auctioned among underwriters today. New York-based Jefferies Group Inc. was the winning bidder, and reoffered five-year bonds at 1.6 percent.

“That helped the market a little bit,” Boylen said.

The New York issuer, which also does business as Empire State Development Corp., sold $576.1 million of 5.77 percent taxable Build America Bonds due in March 2039. Investment banks led by Goldman Sachs Group Inc. handled the deal.

Tax-Exempt Bonds

New York, which previously considered selling Build America Bonds due in 2024 in this transaction, opted to sell about $170 million more in tax-exempt bonds instead, according to data compiled by Bloomberg.

Under the Build America program, the federal government agrees to pay 35 percent of the taxable interest on bonds sold by the end of 2010 for public works.

The state agreed to pay 150 basis points more than the benchmark 30-year U.S. Treasury bond. The so-called spread was wider than the 145 basis points New York set on similar debt in October and the 130 basis-point yield premium in August.

New York’s personal income tax collections, its largest source of revenue, fell $4.73 billion, or 21 percent, from a year earlier, according to a report issued today by Comptroller Thomas DiNapoli.

Dormitory Authority

New York sets aside the first 25 percent of its personal income tax revenue to cover the bonds, which are sold through different issuers including the state’s Dormitory Authority.

The set-aside “fully discounts any concerns about its volatility,” S&P analysts led by David Hitchcock said in a Nov. 10 report.

Officials project the decline in personal income tax revenue will be 5 percent by the end of fiscal 2010, after accounting for a temporary increase in the tax, according to Fitch Ratings, which assigns its AA- grade and a stable outlook.

Moody’s Investors Service doesn’t rate the bonds.

Fitch expects “the state will be able to address the budget shortfall in a manner consistent with the current rating level,” analysts led by Laura Porter said Nov. 6. “Volatile personal income tax revenues as well as the extent of actual financial services industry losses, and the ultimate shape that the industry takes, remain major uncertainties.”

The proceeds of New York’s latest financing will finance projects for state prisons, courts, public universities and police facilities; grants to local governments; and state-agency equipment purchases. The deal also will help fund a computer- chip research and development center in New York for Sunnyvale, California-based Globalfoundries Inc.

L.A. International Airport

Also today, Los Angeles International Airport sold $307.2 million of Build America Bonds, including a 30-year term issue with a taxable interest rate of 6.582 percent, about 2.3 percentage points more than Treasuries.

Invesco PowerShares and Eaton Vance Management today introduced two funds that will invest primarily in Build America securities, calling each the first of its kind.

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

Last Updated: November 17, 2009 17:21 EST