California, the most indebted U.S. state, cut preliminary yields on some maturities as it marketed $2 billion of tax-exempt bonds to individuals for a second day, according to a person with direct knowledge of the sale.

Initial yields on 10-year debt are being offered at 2.69 percent, down from 2.7 percent yesterday, according to the person, who declined to be named before the sale’s planned completion tomorrow. For securities due in February 2038, the offer’s longest maturity, initial yields were lowered to 4.08 percent from 4.09 percent yesterday,

The state took orders from individuals for 38 percent of the bonds yesterday, according to the California treasurer. Investor requests tallied $765 million, even as the state lowered the 10-year yield by a percentage point from October, Treasurer Bill Lockyer said in a statement.

“The retail demand has been pretty hefty, so we’re pleased with the results so far,” Lockyer said yesterday.

The general-obligation issue comes as yields on AAA 30-year bonds held near the lowest level since at least January 2009, according to a Bloomberg Valuation index.

“There’s a lot of pent-up demand out there,” said Alan Schankel, fixed-income director at Janney Montgomery Scott in Philadelphia, in an interview. “Residents want to buy California bonds if they can so they don’t have to pay state tax.”

Borrowing Curbed

Governor Jerry Brown curbed borrowing last year to help shrink deficits. The state offered $3.3 billion in debt in 2011, the lowest amount in four years. That crimped the supply of California state and local bonds, which returned more than the full $3.7 trillion muni market in each of the past three years.

California last sold bonds in October, when a 10-year portion priced to yield 3.7 percent, according to data compiled by Bloomberg.

Demand may increase for California tax-exempt bonds if voters approve Brown’s proposed November ballot measure seeking to raise tax rates on personal incomes higher than $250,000 to help close a $9.2 billion deficit.

Initial yields on this week’s sale range from 0.66 percent on two-year securities to as high as 4.08 percent on some 26- year bonds, according to the person familiar. The state is offering the securities to individuals for a second day today and then institutional investors can place orders tomorrow.

Preliminary interest rates on the offering indicate the most-populous U.S. state is set to pay a smaller yield spread over benchmark debt than in October.

Yield Spread

The bonds maturing in 10 years are being offered at about 78 basis points more than the 1.91 percent yield on top-rated debt of the same maturity. The difference is down from 128 basis points on similar-maturity bonds in October. A basis point is 0.01 percentage point.

Proceeds from the sale will refund debt. J.P. Morgan Securities LLC, Barclays Capital and Wells Fargo Securities are managing the sale.

California state and local debt returned 14.8 percent last year, according to a Bank of America Merrill Lynch index tracking prices and interest income. That’s the most since 2009 and more than the 11.2 percent return for the broader market, 9.8 percent for Treasuries and 7.5 percent for top-grade corporate debt.

In January, California issues returned 3.3 percent, more than the muni market, Treasuries and corporate securities, the indexes show.

A 10-year California general-obligation bond sold in October traded on Feb. 6 with an average yield of 2.67 percent, or 90 basis points more than the index of top-rated debt.

The outlook on California’s credit was revised to positive from stable by Standard & Poor’s on Feb. 14. S&P has an A-rating on $73.4 billion of general-obligation debt, its fourth-lowest investment grade and the worst of any state. Moody’s Investors Service rates the state A1, the second-lowest after Illinois.