Washington will sell $786 million in general obligation bonds Wednesday in a deal that has grown nearly a quarter in response to market hunger for tax-exempt paper.

The state will price for competitive sale $398 million in various-purpose GO bonds and $388 million in motor vehicle fuel-tax GOs, according to Svein Braseth, director of the bond program for the state.

Officials increased the sale by 23% from an initial estimate of $638 million due to the favorable market, said Ellen Evans, deputy treasurer for debt management. “Interest rates are at historic lows and our goal is to save taxpayers financing costs.”

Moody’s Investors Service assigned an Aa1 rating with a stable outlook to the bonds, while Standard & Poor’s and Fitch Ratings assigned an AA-plus. All have a stable outlook.

Washington’s bonds should be be popular as demand remains high for well-rated tax-exempt paper.

“This is a market where pretty much any sort of vanilla, or high-grade paper, will be well-received,” said fixed-income portfolio manager Kenneth Naehu at Bel Air Investment Advisors in Los Angeles. “Just about all new issues will be well-received.”

The state has around $16 billion of GO bonds outstanding.

“Washington’s economy is characterized by generally sound performance and increased diversification, though current performance is weak,” Fitch said in a report this week.

Moody’s said the state has conservative budget controls, strong demographic trends and better financial flexibility due to an improved rainy-day fund going into the recession.

However, Moody’s also noted that Washington has been hamstrung by economic weakness, a steep housing downturn, and exposure to aerospace industry volatility. The rating agency said state debt ratios are above average and likely to increase.

The state recently reduced its economic forecast and is expected to revise its revenue forecast downward this week, Fitch said.

The state’s bond counsel is Foster Pepper and its financial advisers are Montague DeRose and Associates and ­Seattle-Northwest Securities Corp.

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Corrected September 15, 2010 at 12:44PM: Revised Moody's rating to Aa1