Ca California Municipal Bonds Loading... : Investor Sentiment and Bull/Bear Views

Texas municipal bonds face higher borrowing costs and wider spreads compared to California because Texas's anti-ESG policies and climate risks make them more hazardous for investors.

Texas municipal bonds carry an unusually wide yield penalty versus California munis. Texas's SB 13 anti-ESG law initially drove away major underwriters, and even after banks left the Net Zero Banking Alliance the spread remains because Texas's climate risk and anti-science policy are hazardous for muni investors, while California's opposite ESG and climate stance supports persistently high demand for its munis.

California is facing a fiscal death spiral: budget ballooning while tax base erodes due to corporate and wealth exodus; 1-1.5% of personal income leaves annually; looming $1.5-2 trillion in unfunded pension/healthcare liabilities; permanent high tax rates accelerate the exodus. This makes default or a bailout crisis likely, rendering California municipal bonds extremely risky.

Now that the scale of state-level fraud and fiscal mismanagement is being exposed, Chamath expects the bond market to reprice the risk of state balance sheets. Building on Friedberg's point that the bond market will sniff out how fake and propped up California's economy, balance sheet and pension system are, he says municipal and state bonds will get broken, the 401ks and pension systems that rely on muni yields and tax advantages will start to turn, and the market will reprice and reprice this risk until politicians capitulate even if voters do not force change. He adds that foreign holders of US debt will have zero tolerance for this and will want their debts paid back, adding to the pressure.

California has roughly half a trillion dollars of bonds outstanding, faces an 18 billion dollar deficit that Friedberg expects to climb to 30 billion over the next year while the state keeps issuing bonds, and will have to borrow another half a trillion dollars plus to pay out looming pension obligations. The bond market is therefore crucial for California to keep operating, the state is already in a fiscal bind, and rather than assuming a federal bailout he expects the market to put pen to paper on the reality of how the state is run, so the pressure on California's debt is on.