Page 2 of 4 CREDIT BUBBLE BULLETIN The perils of mopping up
Commentary and weekly watch by Doug Noland
The Federal Reserve needs some basic concrete rules. It's insanity to allow a small group of unelected officials the discretion to pump $85 billion - or more! - of purchasing power into the markets every month. It's undemocratic, highly risky and this has gone on for much too long. If there was one issue worth closing down the government and risking default, this would be it.
The S&P500 gained 0.8% (up 19.4% y-t-d), and the Dow rose 1.1% (up 16.3%). The Morgan Stanley Consumer index jumped 1.6% (up 23.3%), and the Utilities surged 2.7% (up 7.7%). The Banks advanced 1.0% (up 24.0%), and the Broker/Dealers gained
1.1% (up 46.2%). The Morgan Stanley Cyclicals added 0.2% (up 26.5%), and the Transports increased 0.6% (up 25.3%). The S&P 400 MidCaps gained 0.5% (up 23.6%), and the small cap Russell 2000 increased 0.6% (up 27.7%). The Nasdaq100 slipped 0.3% (up 21.5%), and the Morgan Stanley High Tech index declined 0.5% (up 20.4%). The Semiconductors were little changed (up 29.5%). The InteractiveWeek Internet index fell 1.5% (up 27.6%). The Biotechs sank 5.2% (up 35.2%). With bullion down $39, the HUI gold index sank 4.3% (down 52.2%).
One-month Treasury bill rates ended the week up 17 to 25 bps, and three-month rates closed up 4 to 6 bps. Two-year government yields were up 2 bps to 0.35%. Five-year T-note yields ended a basis point higher at 1.42%. Ten-year yields rose 4 bps to 2.69%. Long bond yields increased 3 bps to 3.75%. Benchmark Fannie MBS yields were 5 bps higher to 3.36%. The spread between benchmark MBS and 10-year Treasury yields widened one to 67 bps. The implied yield on December 2014 eurodollar futures increased 1.5 bps to 0.515%. The two-year dollar swap spread was down about one to 12 bps, and the 10-year swap spread declined 3 to 13 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 3 to 77 bps. An index of junk bond risk dropped 14 to 370 bps. An index of emerging market (EM) debt risk fell 13 to 321 bps.
Debt issuance was stronger. Investment grade issuers included Berkshire Hathaway $1.55bn, John Deere Capital $750 million, Duke Energy $400 million, Mid-America Apartments $350 million and The Doctors $200 million.
Junk bond funds saw inflows increase to $489 million (from Lipper). last week's issuers included T-Mobile $5.8bn, Carnival Corp $700 million, Michael Baker International $700 million, L Brands $500 million, NGL Energy Partners $450 million, Memorial Production Partners $300 million, Rhodes $250 million, NQ Mobile $150 million and Aviv Healthcare $250 million.
Convertible debt issuers last week included Liberty Media $1.0bn, Ctrip.com $700 million and Biomarin Pharmaceutical $680 million.
International dollar debt issuers included Sinopec $2.75bn, Dexia Credit Local $2.0bn, Centrica $1.35bn, Kommunivest Sverige $1.25bn, Codelco $950 million, Millicom International Cellular $800 million, Hungarian Development $950 million, Neder Waterschapsbank $750 million, Debt & Asset Trading $627 million, Wynn Macau $600 million, African Development Bank $500 million, Turkiye Bankasi $500 million, Russian Agriculture Bank $500 million, Kookmin Bank $500 million, Syncreon Group $225 million and Home Credit & Finance Bank $200 million.
Ten-year Portuguese yields dropped 15 bps to 6.13% (down 62bps y-t-d). Italian 10-yr yields slipped 2 bps to 4.27% (down 23bps). Spain's 10-year yields rose 9 bps to 4.28% (down 99bps). German bund yields added 2 bps to 1.86% (up 54bps). French yields increased 2 bps to 2.37% (up 37bps). The French to German 10-year bond spread was little changed at 51 bps. Greek 10-year note yields sank 32 bps to 8.65% (down 182bps). U.K. 10-year gilt yields were unchanged at 2.73% (up 91bps).
Japan's Nikkei equities index rose 2.7% (up 38.6% y-t-d). Japanese 10-year "JGB" yields increased less than a basis point to 0.64% (down 13bps). The German DAX equities index gained 1.2% to a 2013 high (up 14.6%). Spain's IBEX 35 equities index jumped 2.6% to a two-year high (up 18.4%). Italy's FTSE MIB surged 3.16%, also to a two-year high (up 16.0%). Emerging markets were higher. Brazil's Bovespa index increased 0.6% (down 12.8%), and Mexico's Bolsa added 0.2% (down 6.3%). South Korea's Kospi index gained 1.4% (up 1.4%). India's Sensex equities index surged 3.1% (up 5.7%). China's Shanghai Exchange jumped 2.5% (down 1.8%).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.23% (up 84bps y-o-y). Fifteen-year fixed rates were up 2 bps to 3.31% (up 61bps). One-year ARM rates increased one basis point to 2.64% (up 5bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 8 bps to 4.49% (up 50bps).
Federal Reserve Credit expanded $13.7bn to a record $3.711 TN. Over the past year, Fed Credit was up $914bn, or 32.7%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $556bn y-o-y, or 5.0%, to a record $11.251 TN. Over two years, reserves were up $1.024bn, for 10% growth.
M2 (narrow) "money" supply jumped $50.4bn to a record $10.879 TN. "Narrow money" expanded 6.7% ($684bn) over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits slipped $1.5bn, while and Savings Deposits gained $27.6bn. Small Time Deposits added $1.7bn. Retail Money Funds increased $2.1bn.
Money market fund assets dropped $19.8bn to $2.667 TN. Money Fund assets were up $103bn from a year ago, or 4.0%.
Total Commercial Paper jumped $11.0bn to $1.066 TN, the high since February. CP is little changed y-t-d, while increasing $101bn, or 10.4%, over the past year.
The US dollar index added 0.3% to 80.36 (up 0.7% y-t-d). For the week on the upside, the Brazilian real increased 1.6%, the South African rand 0.9%, the Mexican peso 0.7%, the Australian dollar 0.4%, the New Zealand dollar 0.1% and the Singapore dollar 0.1%. For the week on the downside, the Japanese yen declined 1.2%, the Swedish krona 0.8%, the Canadian dollar 0.5%, the Swiss franc 0.5%, the Norwegian krone 0.5%, the British pound 0.3%, the Taiwanese dollar 0.3%, the euro 0.1% and the South Korean won 0.1%.
October 11 - Bloomberg (Rob Sheridan): "The cost of shipping iron ore, coal and grains along China's coast rose to an 18-month high as surging imports of the commodities boost demand for vessels to redistribute them between the nation's ports. The China Coastal Bulk Freight Index measuring the domestic shipping prices for commodities advanced 2.2% to 1,167 points in the past week, according to data from the Shanghai Shipping Exchange. It rose 11% since the start of the year and is now the highest since April 2012."
The CRB index added 0.1% last week (down 2.8% y-t-d). The Goldman Sachs Commodities Index was up 0.2% (down 1.3%). Spot Gold sank 2.9% to $1,272 (down 24%). Silver fell 2.3% to $21.26 (down 30%). November Crude dropped $1.82 to $102.02 (up 11.1%). November Gasoline jumped 2.3% (down 3%), and November Natural Gas surged 7.7% (up 13%). December Copper declined 1.0% (down 11%). December Wheat added 0.8% (down 11%), while December Corn fell 2.3% to a three-year low (down 38%).
US Fixed Income Bubble Watch
October 11 - Bloomberg (David J. Lynch and Cordell Eddings): "President Barack Obama knows who is the boss: the bond market. 'Ultimately, what matters is: What do the people who are buying Treasury bills think?" the president told reporters last week, when discussing measures he could take to end the threat of a historic default on the nation's debt."
October 7 - Bloomberg (Lisa Abramowicz): "Hedge funds have amassed the greatest share of the $1.2 trillion US junk-bond market since the credit crisis, raising concern bets with borrowed cash will accelerate losses when the Federal Reserve stops printing record amounts of money. The funds, which typically use leverage to bolster returns, hold as much as 23% of outstanding dollar-denominated high-yield bonds, from as much as 18% last year and the highest since 2008, according to Barclays Plc. Credit hedge funds have boosted assets by 89% since 2008, outpacing the 66% growth of the junk market ... Funds that use leverage may threaten the financial system in a broader selloff, the US Treasury Dept.'s Office of Financial Research wrote in a report gauging risks from investment firms that have ballooned after five years of central bank stimulus ... Credit hedge funds have received $113.3 billion of deposits since 2009 and boosted assets under management to $648.3 billion as of June 30, according to ... HFR."
October 9 - Bloomberg (Fanni Koszeg): "Massachusetts' chief securities regulator will open an inquiry into the impact of Puerto Rican debt on the state's mutual fund investors. The investigation is meant to determine the extent of investors' risk tied to the island's weakening municipal debt obligations, Massachusetts Secretary of the Commonwealth William F. Galvin said ... 'Puerto Rico is currently on the verge of insolvency and many of its obligations are at or near junk rating ... The risks associated with its municipal debt obligation are disproportionally high.' Interest on debt issued by Puerto Rican governments is typically tax-free across the US, and yields on some issues topped 10% in recent weeks amid doubt about whether investors will be repaid. The bonds' high yields and tax-exempt status make them popular with retail investors, according to the statement."
October 9 - Bloomberg (Michelle Kaske): "Puerto Rico's borrowing costs are at a record high as the self-governing commonwealth's revenue trails forecasts, calling into question the island's ability to tackle a debt load greater than that of all but two US states. Investors in the $3.7 trillion municipal market are punishing Puerto Rico even after the nine-month-old administration of Governor Alejandro Garcia Padilla boosted pension contributions and raised taxes to keep the territory's obligations from being cut to junk. His challenge is compounded by a shrinking local economy ... The commonwealth of 3.7 million people has about $58 billion of gross tax-supported debt, trailing only California and New York ... 'We've heard the government of Puerto Rico talk about achieving budget balance in a short time frame and that seems to always be missed,' said Joseph Rosenblum, director of municipal credit research ... at AllianceBernstein LP ... 'There is a huge amount of debt, which worries a lot of people.'"
Federal Reserve Watch
October 11 - Financial Times (Henny Sender): "The Yellen put is proving to be even more seductive than either the Bernanke or Greenspan put. With the expiry of the debt ceiling just days away (possibly), most market players are focusing less on the prospect of a default on government debt and the possible questioning of the dollar's reserve currency status and more on the fact that quantitative easing is alive and well. It is as if Bernanke's statements on tapering on May 22 and then again in June had never been uttered. Mentally, it is May 21 once more. US equities are near their all-time high, rallying 2.2% on Thursday to stand just 33 points off September's record closing high of 1,725.52. Indeed, the only market with any visible sign of jitters was short-dated Treasury bills, which sold off as players in the short-term funding markets declined to accept Treasury bills as collateral ... "