More bad news for California bondholders. Pimco expects yields on California debt to return to their highs from the state’s fiscal crisis last summer, which would slam bond prices.
Credit default swaps have painted an ugly picture of credit deterioration as well:
Bloomberg: California’s credit default swaps, insurance contracts that are generally used to protect against default, have risen 97 per cent since late October to $314,000 to protect an investment in $10 million of bonds. The state has $73 billion of general obligation debt outstanding, according to Treasurer Bill Lockyer, who has repeatedly dismissed any suggestion the state may not make required payments.
A taxable California bond that matures in 2039 traded today for an average yield of 7.79 per cent in blocks of more than $1 million, the highest since Dec. 28, according to Municipal Securities Rulemaking Board data. That opened a gap of 3.15 percentage points between California’s bond and 30-year Treasuries, according to Bloomberg data.
Of course, one could buy these high-yielding securities on the belief that California won’t, politically, be allowed to default on its bonds. After all, much of the bonds are held by individuals, ie. voters.
“California does have problems and some hard decisions to make, but defaulting on its debt is not a viable option,” Costas and Amoroso wrote. Even so, the negative news coming out of the state Capitol may lead the individual investors that Lockyer has relied on to buy much of the state’s debt to sell, Naehu said. As California sold more than $3.4 billion of bonds at the end of October, such buyers accounted for almost 72 per cent of the orders.
“The market is dominated by individual investors right now,” said Naehu. “Those investors have very little to go on and are subject to headline risk.”
One would imagine that a federal bailout is on the table as an ultimate backstop.