NEW YORK -(Dow Jones)- In a measure of investors' optimism--or at least their risk tolerance--two financially troubled municipal issuers, California and Detroit, easily completed debt sales Thursday.

California, which is wrestling with a $20 billion budget hole, received enough demand to increase its offering to $2.5 billion from $2 billion. Detroit, hit by steep job losses in the auto industry and home foreclosures connected to the recession, drew enough bidders to sell $250 million of bonds--helped by a debt guarantee from the state of Michigan.

"Broadly, we would say there is a hunger for yield in the fixed-income market," said Steve Simpson, president and managing director of Gurtin Fixed Income Management LLC in San Diego. He said he considered the California and Detroit deals to be distinct in terms of credit quality and generally prefers California, though he did not participate in this sale.

Record-low U.S. interest rates since the onset of the financial crisis have encouraged investors to seek higher-yielding securities, with some favoring riskier assets that offer higher returns.

An early sign of investor interest in the California deal came during the retail order period Tuesday and Wednesday, when individuals placed $1.38 billion in orders, according to the state's Treasury office. That represented nearly 70% of the original $2 billion size of the tax-exempt general obligation deal, leading the state to bump up the offer on Thursday as pension funds, insurance companies and other institutions weighed in.

Bonds offered to individual investors ranged in maturity from 2012 through 2036, with 5.70% the top yield in the longest maturity in the latest preliminary pricing retail scale. The deal's lead bookrunner is J.P. Morgan Securities.

California has certainly seen its share of financial difficulties recently. Its budget is expected to show about $20 billion in red ink through fiscal 2011, and Gov. Arnold Schwarzenegger has publicly asked the federal government for assistance in righting the state's fiscal woes. High unemployment--13.2% in January--and continued weakness in the housing sector contribute to the grim picture in the most populous U.S. state.

While investors are aware of California's troubles, they understand it's unlikely that the Golden State will default on its bonds, since federal bankruptcy law doesn't allow states to file for Chapter 9 municipal bankruptcy, said Dan Genter, president and chief executive of RNC Genter Capital in Los Angeles. Genter said he bought the five- and 10-year maturities in the deal.

Contributing to demand for the California deal is the fact that federally subsidized, taxable Build America Bonds have zapped the supply of tax-exempt bonds, particularly in longer maturities, and deals from highly rated issuers have also become more scarce. As a result, some investors may be willing to buy slightly lower-rated bonds, given their higher yields.

The robust demand for the California deal shows investors "still have appetite," said Marilyn Cohen, president of Envision Capital Management in Los Angeles. "Everyone is complacent in the sense that if something horrible happens, the federal government will help California. People think everything will be all right."

In the retail order period for the California bonds, demand was particularly strong for bonds maturing in 10 years or less, as well as some intermediate maturities, market participants said. Mostly longer-maturity bonds are being offered to larger institutional buyers, with the longest maturity in 2040 offering a 5.65% yield.

Reflecting the solid demand from individual investors, the yield on intermediate maturities offered during the retail period dropped about three to five basis points, said Gary Pollack, head of fixed income and research for Deutsche Bank Wealth Management, which oversees about $12 billion in fixed-income assets. Pollack said his firm bought some of the middle maturities offered by California.

Detroit also enjoyed good demand, leading it to lower yields on longer maturities, where more of the deal was sold. More than $150 million was in the 2030 and 2035 maturities, which yielded 5.125% and 5.35%, respectively.

California has the lowest rating among all states: Baa1 by Moody's Investors Service, A-minus by Standard & Poor's and BBB by Fitch Ratings.

Later this month, the state is also expected to come to market with a taxable deal, though the size of the issue has not been determined yet, said Joe DeAnda, spokesman for the California state treasurer's office.

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