Vincent Fernando | Feb. 4, 2010, 12:13 AM

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 percent 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 percent 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.

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