Oct. 21 (Bloomberg) -- Municipal bonds headed for their worst monthly performance in a year, as an Alabama state agency raised $680 million, mostly to refinance debt.

Alabama’s Public School and College Authority sold fixed- rate bonds payable from utility and sales taxes at yields ranging from 2.02 percent in 2012 to 4.7 percent in 20 years.

State and local government bonds have dropped almost 2 percent since Sept. 30, based on Merrill Lynch & Co.’s Municipal Master Index, which lost a record 5.1 percent in September 2008. At least four states -- Washington, Hawaii, Maryland and Minnesota -- have postponed or scaled back refinancing plans this month as benchmark borrowing costs rose the most since January as measured by the weekly Bond Buyer 20 index.

The delayed deals “could become a barrier to a near-term market rebound, since they remain an overhang in a market that has struggled recently to handle new issue supply without a significant yield correction,” George Friedlander, municipal strategist at Morgan Stanley Smith Barney in New York, said in an Oct. 16 report.

Municipal issuers want to sell $17.7 billion in fixed-rate bonds during the next 30 days, 45 percent more than the 12-month average, according to an index compiled from planned offerings on Bloomberg calendars.

The Bloomberg BVAL muni benchmark index of 10-year bond yields was little changed at 3.729 percent today, the highest since July 7.

Alabama marketed its deal through underwriters led by Morgan Stanley. The bonds are ranked Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings, each two levels below the top. Ten-year bonds had a 4 percent yield.

Derivatives Agreements

All except $37.8 million of the transaction will be used to refinance previous capital-improvement issues associated with derivatives agreements dating from 2002 that the agency is challenging in court, with a trial date set for next year. The rest will finance new construction loans to local school boards.

Underwriters led by Morgan Stanley and Royal Bank of Canada’s RBC Capital Markets unit are marketing $820 million of bonds backed by lease revenue from California’s State Public Works Board this week.

Individual investors asked for $67.5 million, or almost 26 percent, of the $263.2 million in securities that were offered to them yesterday during a dedicated retail order period, according to an e-mail yesterday from California State Treasurer Bill Lockyer’s office.

When retail buyers got a chance to buy the state’s tax- exempt general obligation bonds on Oct. 6, they ordered $360.8 million, or almost 28 percent, of the $1.3 billion offered. State finance officials and their underwriters ended up increasing payouts on the bonds before final pricing.

Changing Yields

Estimated yields on the Public Works Board deal ranged from 1.47 percent on one-year notes to 5.5 percent on 20-year bonds yesterday. Those levels were adjusted to 1.35 percent and 5.68 percent, respectively, when underwriters offered the remaining tax-exempt bonds to institutions such as mutual funds and insurance companies.

Fitch rates the bonds BBB-, one level above high-risk, high-yield junk. Moody’s ranks them one level higher at Baa2. S&P assigns its A- rating, the fourth-lowest investment grade.

California will finish raising the $820 million by selling federally subsidized, taxable Build America Bonds tomorrow. The state board is borrowing to finance a new complex for a division of the California Natural Resources Agency and improvements to prisons, state office buildings, veterans’ homes and hospitals for people with mental disabilities.

Maryland Borrows

Maryland sold $200 million of top-rated general obligation bonds through bidding among investment banks to fund public works projects.

The overall interest cost was 2.93 percent, the lowest in at least 20 years including the previous low of 3.08 percent in August 2009, Maryland State Treasurer Nancy Kopp said in a news release today from Annapolis.

JPMorgan Chase & Co. was the winning bidder for $141.8 million of tax-exempt bonds at 2.846 percent, and Barclays Plc underwrote $58.2 million of Build America Bonds at 3.057 percent, the treasurer said. The federal government covers 35 percent of the interest on the latter portion.

The state delayed plans to refinance debt by selling $603.4 million of its top-rated general obligation bonds after rising yields this month erased projected savings.

“We plan to find the right time to sell refunding bonds,” Kopp said in the release. “We will need to move quickly to take advantage of opportunities in this volatile market.”

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

Last Updated: October 21, 2009 16:55 EDT