Investors in California municipal bonds are scrambling to buy tax-exempt bonds issued by California issuers.

This demand benefits borrowers statewide—even those with credit ratings below AAA.

Overall prices for U.S. state and local government bonds have risen this year, with 10-year municipal bonds yielding about 64% of the yield on comparable U.S. Treasury bonds, as the asset class attracts significant new capital. This trend is particularly pronounced in California, where investors view municipal bonds as a safe haven from high state income taxes.

According to strategists at JPMorgan Chase, inflows into municipal bond funds have exceeded $18 billion so far this year, the third-highest on record.

“We’ve always expected California bond transactions to follow the AAA rating curve,” said Travis Moore, portfolio manager at Whittier Advisors. “The question is how long that will last.”

Moore anticipates the state’s planned $2.5 billion bond offering this week will be well-received, noting that the yield on the deal could be higher than prices traded on the secondary market.

Indeed, this bond offering comes amid global market turmoil, with the Middle East conflict causing market volatility. Even municipal bonds experienced a brief sell-off last week.

According to preliminary bond filings, the upcoming California offering includes $1.4 billion in general obligation bonds and $1.1 billion in refinancing bonds. Moody’s has assigned the bonds an Aa2 rating, the third highest rating among investment-grade bonds.

The proceeds from this general obligation bond (GO bond) offering will be used to finance or refinance voter-approved projects and expenses, including behavioral health infrastructure, K-12 public education facilities, disaster preparedness, and high-speed rail projects. The deal is led by RBC Capital Markets and JPMorgan Chase.

California borrowers have found particularly favorable pricing for short-term bonds, a type favored by retail investors. For example, a one-year bond issued by the San Diego County Regional Transportation Commission in February yielded 47 basis points less than AAA-rated bonds.

Similarly, of the approximately $412 million in bonds issued by the Santa Clara County Financial Services Authority, one one-year bond was priced about 30 basis points lower than AAA-rated bonds.

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