In their weekly publications, Citibank's George Friedlander and Morgan Stanley's Ryan Brady both point out the relative cheapness of CA municipal zeros. We could not agree more and have been touting these structures for quite a while. Wall Street now appears to agree with us. Here is what we like:

1) Credit - CA credits are improving dramatically as increased tax receipts have pushed the CA budget into a surplus. The property taxes that secure most of these structures are considered "dedicated" and therefore are not subject to a "stay" in bankruptcy proceedings.

2) Supply - Recent CA legislation prevents school districts from issuing long dated, non callable zero structures.

3) Yields - Long dated zero cpn yields are trading above 5% as compared to the most recently issued CA GO (with a 5% cpn) which ylds 3.90.

Here is a graph of the yield spread between non callable CA zeros and CA cpns: This spread should be closer to 50 not 120!