The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc., as the sovereign debt crisis deepened.
This panic among CDS insurers is enough to force up the yields on the sovereign debt of Portugal et al. Major bondholders like PIMCO booked some terrific gains these past years when governments fell in love with deficit spending. Their bond portfolios rose when central banks raced to ZIRP. Now the bill is coming due and bond funds - along with those hedge funds that thought the smart move was to bet on debt-fueled fiscal stimulus - are going to be hurt. Greeks couldn't care less that their public employees' intransigence on benefits is a proximate cause of this mess.
Some government entities learn faster than others that fiscal profligacy must end. San Diego is firing its first salvo in what will prove to be a long battle against public employee unions. This battle will rage in seats of government all across America as elected officials come to grips with pension plan deficiencies. If only European capitals could adopt some of San Diego's common sense. Hey, SDCERA, are you still exposed to credit default swaps through D.E. Shaw?
Full disclosure: No position in bond funds at this time.
