California’s Preference

California would “prefer that the federal government meet its obligations,” Tom Dresslar, a spokesman for state Treasurer Bill Lockyer, said via e-mail. “That said, the reduction in subsidies doesn’t exactly break the bank here.”

The loss represents a “minute” fraction of the state’s $98 billion general-fund budget, he said.

Most issuers can withstand the subsidy reductions and make interest payments even if the federal government halted reimbursements altogether, Close said. The program prohibited sales from issuers such as hospitals and retirement communities, which have historically been among the riskiest municipal borrowers.

“A subsidy reduction even for very large issuers under the program should not have a material impact on their ability to pay,” Close said.

Investors are still demanding higher interest rates to own Build Americas from issuers such as California.

Some state debt maturing in November 2040 traded Oct. 2 at a yield that was 1.96 percentage points more than Treasuries, the widest spread since June, data compiled by Bloomberg show.

Similarly, New York City Build Americas due in June 2035 traded Oct. 8 at a yield 3.42 percentage points more than benchmark Treasuries, the biggest penalty since July 26.

Issuance Increase

Issuers from Maine to California are set to offer about $5 billion in long-term debt this week, the most since the period through Sept. 27. They’re issuing with benchmark yields at the highest in three weeks.