Aug. 1 (Bloomberg) -- Puerto Rico postponed its offering of $238 million of bonds backed by the U.S. commonwealth's share of payments by cigarette makers to states and local governments, citing ``market volatility.''

The 50-year, tax-exempt bonds were to be issued by the Children's Trust, a nonprofit created by Puerto Rico to sell the rights to revenue from the 1998 master settlement with tobacco companies. A portion of the sale, proceeds of which were to help plug a budget deficit, was to have included high-risk, high- yield securities without a credit rating.

It is the second time in eight weeks that Puerto Rico has put off a bond sale because of higher borrowing costs. In June, commonwealth officials delayed indefinitely a $1.5 billion refinancing of general obligation bonds as benchmark municipal yields hit 11-month highs. The average risk premium on high- yield municipal bonds increased 0.13 percentage point in July, according to Lehman Brothers Holdings Inc. indexes.

``At the levels they would need to clear the market, they felt they wouldn't generate enough to satisfy the commonwealth's needs,'' said Joseph Darcy, who manages $3 billion in municipal bond funds for Dreyfus Corp.

The Government Development Bank for Puerto Rico, the commonwealth's financial adviser, said in a statement that the tobacco bond offering ``may be reactivated if and when market conditions improve.''

The bonds, if sold, wouldn't receive any of the settlement revenue until after tobacco bonds the Children's Trust issued in 2002 and 2005 are paid off.

Bear Stearns Cos. is to manage the deal, which has been moved to the day-to-day calendar.

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

Last Updated: August 1, 2007 17:42 EDT