Oct. 16 (Bloomberg) -- California sold $5 billion of short- term notes to avert a cash shortage after taking record orders from individual investors this week following a sales pitch featuring Governor Arnold Schwarzenegger.

State Treasurer Bill Lockyer added $1 billion to the size of the initial offering after individual investors bought more than $3.9 billion of notes. Lockyer also was able to reduce the yields on the two-part sale, which remained as much as 0.88 percentage point above what California paid last year.

California, the biggest borrower in the U.S. municipal bond market, typically sells short-term notes to cover bills until tax revenue arrives late in the year. This sale comes amid a global financial crisis that has constricted lending. The state had said it might run out of cash by November if it couldn't borrow.

``It's a good sign that there are investors out there buying, given the difficulties in the market,'' said Paul Brennan, who oversees about $12 billion in municipal bonds as portfolio manager at Nuveen Asset Management in Chicago. ``It is crucial that they get it done.''

Underwriters led by Bank of America Corp. and Goldman Sachs Group Inc. priced $3.8 billion of notes maturing June 22, 2009, to yield 4.25 percent, down from an upper estimate of 4.5 percent. The $1.2 billion of notes due May 20 were priced to yield 3.75 percent. California's $7 billion note sale in October 2007 was priced to yield 3.37 percent.

Issuance Down

States and municipalities' ability to borrow remains hampered. About $1.4 billion of long-term, fixed-rate bonds were sold so far this week, data compiled by Bloomberg show.

New York City, also buoyed by retail demand, offered $550 million in tax-exempt and taxable general obligation bonds through Morgan Stanley, up from a planned $345 million transaction size.

Even with that sale, the week's issuance pales next to a weekly average of more than $6 billion before the new-issue market seized up mid-September.

Borrowers that have postponed hundreds of deals are seeking to sell $18 billion in bonds in the next 30 days, the most in almost four months, according to a Bond Buyer index of anticipated offerings.

``Certainly a deal like this ups the bar a little bit,'' said Steven Shachat, senior portfolio manager at Alpine Woods Capital Investors in Purchase, New York, referring to the California deal. ``There are a lot of issuers who are sitting on the sidelines and waiting to see if the market improves, if the environment improves enough for them to come to the market.''

Still More Needed

California's $7 billion notes sale last year was at 1.38 percentage points less than the central bank's benchmark. The U.S. Federal Reserve's target rate for overnight loans between banks is 1.5 percent.

California finance officials estimate the state needs as much as $7 billion, and had planned on borrowing that much until Lehman Brothers Holdings Inc.'s Sept. 15 bankruptcy filing seized up the bond market. Lockyer plans to borrow the rest later this year.

``He bumped up the deal to $5 billion after it became clear institutional investor demand would support the higher amount,'' Lockyer's spokesman Tom Dresslar said in an e-mail.

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

Schwarzenegger, featured in radio advertisements pitching the bonds to state residents, bought $100,000 of the securities, press secretary Aaron McLear said.

Parking Money

``Whether it's a combination of Governor Schwarzenegger going on the radio and talking about the importance of doing this and how it helps schools and public safety, or it's people looking for quality places to park their money for the next several months with a good return that is tax exempt, we don't know,'' Lockyer said in an interview. ``Whatever the reasons, we're pleased.''

Schwarzenegger two weeks ago told the U.S. Treasury California and other states may need emergency federal loans if the debt market remains constricted. Last week, the Republican governor said the need had lessened.

S&P placed California's long-term general obligation rating of A+ under review for possible downgrade on 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.''

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

Last Updated: October 16, 2008 15:35 EDT