NEW YORK (Dow Jones)–California’s lower credit rating and bleeding budget are no obstacles for investors eager to buy the state’s latest debt offering, with demand so high that the deal was expanded at the last minute Thursday to satisfy the buying interest.

Individual investors put in $1.38 billion in orders during the two-day retail order period Tuesday and Wednesday, representing nearly 70% of the original $2 billion size of the tax-exempt general obligation deal, according to the state’s Treasury office. With a similar degree of interest coming from institutional investors, the state raised the size of the deal to $2.5 billion.

“Obviously we’re very pleased with the retail demand, and the strong demand today from the institutional investors led us to increase the size of the sale,” said Joe DeAnda, spokesman for the California state treasurer’s office.

Record low U.S. interest rates since the onset of the financial crisis have encouraged investors to seek higher-yielding securities, favoring riskier assets that offer higher returns. California’s deal comes in the wake of a debt offering by the city of Detroit this week, a city dealing with a depressed economy and financial troubles.

“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. “Funds seem to be flowing indiscriminately into high-grade fixed-income, and in many cases, forcing investors to chase already highly priced assets.”

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.

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.”

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