SAN FRANCISCO — Washington will sell $1.5 billion of bonds starting next week as it aims to borrow new money and refund a big chunk of debt to take advantage of the lowest interest rates in decades.

The state hopes for present-value savings of more than 5% when it sells $960 million of general obligation refunding bonds on Tuesday.

“There is a lot of demand both from institutions and retail,” said Alexander Anderson, a portfolio manager for Envision Capital Management in Los Angeles. “By foreseeing increasing issuance, it shakes things up a little bit because finding yield is very challenging.”

Interest rates as measured by The Bond Buyer’s 20-Bond Index hit a 45-year low last week.

The yield for the index has fallen nearly 10 percentage points since January 1982, when it reached a record high.

“We are optimistic about a positive market response and will continue to monitor trades and pricings throughout the week,” said Chris McGann, a spokesman for state Treasurer James McIntire.

On Tuesday, the two-year yield municipal bond index yield closed even at 0.35% for its eighth consecutive trading session while the 10-year muni yield finished flat at 1.87%, according to Municipal Market Advisors.

The 30-year yield fell one basis point to 3.36%.

A million-dollar block of Washington GO refunding bonds maturing in 2026 with a coupon rate of 5% and an initial price of 109 of par value sold on Wednesday in the secondary market for 118 of par with a yield of 2.47%.

The state will sell its refunding bonds starting Tuesday via competitive sale in two series — $699 million of various-purpose GO bonds and $260 million of automobile tax-backed GOs. The bonds will have maturities from 2013 through 2029.

The new-money sale will start on Feb. 28 and will include $346 million of various-purpose GO bonds and $188 million of GO bonds backed by the vehicle tax.

The money raised by the bond sale will be used for various state construction and transportation projects.

The bonds will have maturities from 2013 through 2042.

The deal carries Washington’s double-A-plus across-the-board ratings. In recent reports, rating agencies have noted the state’s strong financial management amid the challenging local and national economy, as well as its above-average debt load.

Lawmakers are working to tackle a $1 billion budget shortfall and buffer reserves in the current two-year budget during a two-month session that started earlier this month.

Gov. Christine Gregoire has proposed a temporary half-cent sales tax increase to help raise revenues.

She has also proposed a $3.6 billion transportation package over the next decade funded by a $1.50 fee on every barrel of oil produced in the state.

The higher sales tax would help fund education, social services and public safety programs that have been cut in recent budgets.

Washington doesn’t have an income tax.

The governor has said the state is facing a $1.6 billion shortfall over the next 10 years to maintain highways and a $1.3 billion deficit in ferry system maintenance funds.

Washington’s financial advisors on the sales are Montague DeRose and Associates LLC and Seattle-Northwest Securities Corp.

The state’s bond counsel is Foster Pepper PLLC.

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