March 19 (Bloomberg) -- Wisconsin completed its $1.54 billion municipal bond sale, saving millions of dollars in interest the day after the Federal Reserve’s announcement that it would expand asset purchases to include U.S. government debt.

The Federal Reserve announced yesterday its plan to buy up to $300 billion in U.S. debt. Treasuries yesterday headed for a weekly gain as investors bet yields will remain low. Wisconsin benefited by cutting yields in nearly all the maturities after taking institutional orders yesterday.

“We got help from the Fed’s action,” Frank Hoadley, Wisconsin’s director of capital finance, said in an interview. “It forced a significant re-pricing up and down the scale.”

Wisconsin’s sale marks the largest U.S. offering of tax- exempt, long-term debt in almost a year and the biggest of almost $8 billion in state and local government bond sales this week. The sale may be topped next week by California’s plans to sell a $4 billion deal, its first offering since June 2008. California couldn’t sell bonds during debate on balancing its budget.

The Federal Reserve’s announcement may help drive down municipal bond yields that have risen to attract buyers for four weeks. Yields on top-rated, 30-year general obligation bonds have risen about a quarter percentage point in that time to 5.38 percent today, the highest in nine weeks, according to Concord, Massachusetts-based Municipal Market Advisors. That yield fell yesterday to 5.28 percent.

Wisconsin, which moved up its sale from next week to beat California to market, cut yields in some of the largest maturities by as much as seven basis points when it was able to reset prices after getting more orders than bonds. A basis point equals 0.01 percentage point.

Individual Orders Surge

Today’s institutional order period followed two days of taking orders from individuals, which surged after the Federal Reserve’s announcement, Hoadley said. Yields in the longest maturities were cut by 2 basis points to 5 basis points, he said.

Hoadley said each basis point cut translated into about $250,000 a year of annual interest savings. “This morning we were able to do an aggressive re-pricing,” he said. The banks that arranged the sale, led by Barclays Plc, got $2 billion of orders for the $1.2 billion of bonds available for institutions such as insurance companies and mutual funds.

$309 Million in Savings

Wisconsin, which is closing a budget deficit by refinancing bonds backed by tobacco-settlement money, is the first state since the 1998 master agreement with cigarette makers to reverse tobacco-settlement securities with debt backed solely by state appropriations. The state plans to retire debt sold in 2002 by Badger Tobacco Asset Securitization Corp., the nonprofit financing arm that bought the right to collect the settlement in exchange for a lump-sum payment.

Wisconsin will get about $309 million in savings to help balance its budget for the two years ending June 30. The new issue will be secured by the state’s commitment to appropriate debt service payments from its general fund. Money raised with this week’s transaction will fund escrow accounts to pay off at face value in 2012 tobacco bonds that traded as low as 58 cents on the dollar in December.

The sale will be good for investors, who will be taken out at par, and good for state officials, who will get cash to resolve the deficit, said Christopher Ryon, associate portfolio manager with Santa Fe, New Mexico-based Thornburg Investment Management, which manages about $3 billion of municipal bonds.

The state’s taxpayers may not benefit after taking on liability for the debt and the cash flowing from its share of the settlement, Ryon said. Payments from the settlement have fallen about 10 percent, he said.

Taxpayers ‘On the Hook’

‘If the cash flow falls short, then the taxpayers are on the hook for the debt service payments,” Ryon said. “They’re taking on increased risk.”

The Wisconsin general fund annual appropriation bonds are rated AA-, the fourth-highest investment grade, by Standard & Poor’s; A+, a step lower, by Fitch Ratings; and a similar A1 by Moody’s Investors Service. The tobacco-settlement debt has a BBB+, the third-lowest investment grade, from Fitch; a BBB, the second-lowest investment assessment, from S&P; and a Baa3, the lowest investment evaluation, from Moody’s.

This year’s largest completed issue of federally tax-exempt bonds was a $950 million deal by the Los Angeles Unified School District in early February, data compiled by Bloomberg show.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

Last Updated: March 19, 2009 18:37 EDT