April 22 (Bloomberg) -- California plans to raise about $6.9 billion today in the largest long-term general obligation bond sale in the state’s 158-year history, aided by a federal subsidy program introduced in the federal stimulus package.

California plans to sell $5 billion of 25- and 30-year taxable debt with the federal government rebating 35 percent of the state’s interest costs. The deal also includes $1.855 billion in taxable notes that aren’t subsidized and will come due in four through seven years.

The state, the most populous in the U.S. and its lowest rated, already received “expressions of interest” representing more than $10 billion from investors, California Treasurer Bill Lockyer said in a Bloomberg Television interview yesterday.

The federal subsidies may allow the state to save 60 basis points to 65 basis points off what finance officials might obtain in the tax-exempt marketplace, Lockyer said. A basis point is 0.01 percentage point. The offering was increased yesterday from an initial range of $3 billion to $4 billion.

Other Build America Bonds have jumped in secondary market trading since the first public offerings arrived last week.

New Jersey Turnpike Authority 7.4 percent securities due in 2040 rose to about 104.8 cents on the dollar to yield 7.03 percent today, according to data reported to the Municipal Securities Rulemaking Board. Thirty-year University of Virginia bonds paying 6.2 percent in taxable interest changed hands at 107 cents to yield about 5.71 percent, MSRB data show.

Best in Two Decades

State and local government bonds are headed for their best April performance in two decades, as investors embrace the new taxable borrowing program and reduce tax-exempt issues, based on Merrill Lynch & Co. index data. The Municipal Master Index rose 2.99 percent this month through yesterday, compared with a full- month return of 3.30 percent in 1989.

Yields on top-rated five-year tax-exempt bonds slid to 2.1 percent yesterday, the lowest since June 2003, according to a daily index compiled by Municipal Market Advisors of Concord, Massachusetts.

California’s bond deal will be the fourth largest by a municipal issuer and the second-largest taxable deal after Illinois’s $10 billion pension bond offering in 2003. Just last month, California sold $6.54 billion of tax-exempt general obligation bonds to end a nine-month absence from the markets.

In today’s transaction, the 4-year federally taxable notes may price to yield 365 basis points more than similar-maturity Treasuries; the 5-year debt may yield 325 basis points more than benchmarks; the 6-year debt may yield 345 basis points more than Treasuries; the 7-year debt may pay 340 basis points more, and the 25- and 30-year debt may both pay a spread of 365 basis points, according to a person familiar with the transaction.

Otherwise Qualify

California will use the proceeds of the Build America Bonds for projects that would otherwise qualify for traditional tax- free financing such as schools, roads and parks. The non- subsidized part of the financing will fund stem cell research, housing and other projects that usually require taxable debt, Lockyer said.

Goldman Sachs Group Inc., JPMorgan Chase & Co., Barclays Plc and Morgan Stanley are running the deal.

Tax-exempt issues represented 87 percent of municipal bonds sold last year, before the Obama administration created the Build America Bonds program, which allows for sales through the end of 2010, according to a report this week from Merrill, part of Bank of America Corp. Taxable deals were 7 percent in 2008; those subject to the alternative minimum tax were 6 percent.

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

Last Updated: April 22, 2009 10:45 EDT