There is a paradox at the heart of the US municipal finance market. Local governments are facing some of the worst economic conditions since the Great De-pression and their fin-ances have deteriorated. Yet in-vestors are snapping up their debt in record amounts.

Nowhere is this more apparent than with California. Early last month, the state was issuing IOUs as it scrambled desperately to offset a budgetary shortfall. Three weeks later, it easily sold $8.8bn of debt. Next week, it is selling another $4.5bn.