Muni Bonds in California Get Expensive Amid Flurry of Demand

Municipal bond investors are clamoring for tax-free debt sold by California issuers.

That demand is benefiting borrowers across the state — even ones without AAA credit ratings.

In general, U.S. state and local government debt has gotten more expensive this year, with the 10-year muni benchmark offering about 64% yield on similar US Treasuries, as the asset class attracts new money. That dynamic is especially pronounced in California, where investors turn to municipal bonds as a refuge from high state income taxes.

So far this year, muni bond funds have seen more than $18 billion of inflows, the third highest on record, according to JPMorgan Chase & Co. strategists.

“We would always expect California to trade through the AAA curve,” said Travis Moore, portfolio manager at Whittier Advisors. “It’s kind of a question of how much.”

Moore expects the state’s planned $2.5 billion debt sale this week to be well received, noting that the deal will likely offer yields that are elevated compared to where bonds are trading in the secondary market.

To be sure, the issuance arrives at a turbulent time in global markets rocked by the war in the Middle East. Even muni bonds briefly sold off last week.

California’s upcoming bond offering includes $1.4 billion of general obligation bonds and $1.1 billion of refunding, according to preliminary bond documents.

Proceeds from the sale of the GO bonds will be used to finance or refinance voter approved projects and costs, including behavioral health infrastructure, K-12 public education facilities, disaster preparedness and a high-speed rail. The deal is led by JPMorgan Chase & Co. and RBC Capital Markets.

California borrowers have seen bond deals price particularly well for short-dated maturities that retail investors tend to favor. For instance, the San Diego County Regional Transportation Commission’s bond sale in February offered a one-year maturity with a yield that was 47 basis points lower than AAA-rated debt.

Similarly, a roughly $412 million bond sale from the Santa Clara County Financing Authority includes a one-year maturity that priced at a spread that was about 30 basis points lower than AAA debt.

For the state’s deal set for Wednesday, some bonds maturing in two years are being offered to investors at a yield of 2.14%, which is roughly in line with AAA debt, according to a preliminary pricing wire seen by Bloomberg. Details of the sale could change as part of the pricing process.

Leslie Martin, a portfolio manager at Cavanal Hill Investment Management, said her firm generally avoids California bonds because they tend to be too rich relative to the rest of the market.

“Heavy local demand that exceeds supply and high state income tax rates combine to keep California yields so depressed that they rarely make economic sense for non-California investors,” said Martin.

Top photo: Contractors install traffic control lights on an on-ramp to west bound Interstate 80 in El Cerrito, California, on Monday, May 5, 2025. Photographer: David Paul Morris/Bloomberg.