(Bloomberg) -- The yield premium on California bonds has jumped just as the most populous US state readies to borrow $1.5 billion while staring down a massive budget deficit.

An index showing the yield on 10-year California general obligation bonds compared to top-rated benchmark debt has widened as much as 27 basis points since the end of February, data compiled by Bloomberg show. Investors selling municipal debt from their portfolios to pay their taxes is in part driving the move.

The widening of that gap comes as lawmakers grapple with how to fill a roughly $73 billion budget shortfall expected in the fiscal year that begins July 1. The one-year median of the spread between 10-year California municipal bonds to AAA-rated securities had been around 2 basis points. That metric now stands at more than 11 basis points. 

In the run-up to April 15 tax deadline, munis usually cheapen as investors often sell their holdings to cover tax liabilities, consequently widening spreads and pushing yields higher through supply and demand dynamics.

To be sure, the cheapening of California’s debt has been muted compared to what happened in the wake of the 2008 great financial crisis, when the state’s risk premium widened by more than 100 basis points as it confronted debilitating back-to-back deficits and political infighting over how to solve the problem.

“While worries about CA GO spreads during the next recession are not completely misplaced, CA GO spreads may not widen to the same extent as they did in 2009 – 2010,” Wells Fargo municipal strategists led by Vikram Rai said in a note to clients earlier this week. 

Read more: California Deficit Seen Rising by $15 Billion as Revenue Drops

California’s general obligation bonds are rated Aa2 by Moody’s Ratings, AA- by S&P Global Ratings and AA by Fitch Ratings, though Moody’s revised its outlook for the state to negative from stable last year. 

Well-established demand for California tax-exempt bonds from wealthy residents is helping to keep the spread from widening too much. The state is selling roughly $1.5 billion of general obligation bonds on April 11. The sale includes $885 million of federally taxable debt and $600 million of tax-exempt debt to fund a variety of voter-approved capital projects and refund existing bonds to cut the state’s long-term borrowing costs. 

When the state sold $2.6 billion of general obligation bonds in March, 10-year debt priced to yield 2.74%, about 21 basis points above top-rated securities. In September, a similar maturity priced at a spread that was slightly higher at 24 basis points.

The desire for tax-exempt investments means that some deals from local governments in California have been able to sell at yields lower than AAA-rated benchmark muni securities. The Los Angeles County Metropolitan Transportation Authority sold $114 million of bonds last month with yields as much as 30 basis points below that benchmark, according to data compiled by Bloomberg.

Wells Fargo’s Rai sees the potential for spreads on California GOs to tighten after tax season.

“We remain positive on California, despite its perceived challenges,” wrote Rai.

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