Investors pounced on $1.8 billion in California bonds this week, sending the strongest signal yet about growing confidence in the recovering state budget.

The bond sale that ended Thursday exceeded expectations despite the specter of rising interest rates and the state's lowest-in-the-nation bond rating.

The bonds were so popular that state officials boosted the offering from $1.75 billion to $1.8 billion, and they saved money by selling at a lower rate. A spokesman for the state treasurer's office said the sale was oversubscribed, meaning the banks had more orders from investors than bonds to sell.

"There seems to be a higher comfort level with the state's credit, partly because of the passage of the economic recovery bonds," said David Blair, vice president and senior analyst with Nuveen Asset Management.

The general obligation bond sale, used to repay loans for state construction projects, is a positive sign as state officials prepare to sell $12.3 billion in voterapproved deficit bonds over the next two months.

In March, California voters approved $15 billion in deficit bonds that were placed on the ballot by Gov. Arnold Schwarzenegger and state lawmakers. State officials plan to use the money from the sale to pay back short-term borrowing that comes due in June.

The fevered buying came despite growing fears of rising interest rates. On Wednesday, while testifying before the Joint Economic Committee of Congress, Federal Reserve Bank Chairman Alan Greenspan said "interest rates must rise at some point." Generally, rising interest rates are bad for buyers of municipal bonds because when rates go up, the value of bonds with lower rates goes down.

But since the bonds are tax-free for investors in California, many buyers will disregard rate fears to buy municipal bonds.

"There are a lot of wealthy investors in California," said Kim Rueben, research fellow with the Public Policy Institute of California.

Also, investors purchased the bonds despite California's low bond rating, which, at triple-B, is the lowest state bond rating in the United States and just above junk bond status.

On Friday, it's expected that the bond rating agencies will announce ratings for the deficit reduction bonds - the first of which will be sold to retail investors starting on the same day. Market analysts expect the ratings for the deficit reduction bonds to be higher than this week's general obligation bond rating because Schwarzenegger and lawmakers included a quarter-cent sales tax to help pay for it.

Economists cautioned that the sheer size of debt that California is selling could raise interest rates and the price to sell the bonds for California and other issuers. When there is a higher supply of bonds on the market than investor demand, the cost of selling the bonds goes up.

"California will not only have an impact on its own cost of borrowing, but on others' costs of borrowing as well," said Sun Wong Sohn, executive vice president and chief economic officer of Wells Fargo Bank.