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     Dec 16, '13


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CREDIT BUBBLE BULLETIN
Q3 2013 Flow of Funds
Commentary and weekly watch by Doug Noland

One-month Treasury bill rates ended the week at one basis point, and three-month rates closed at 6 bps. Two-year government yields were up 2 bps to 0.33%. Five-year T-note yields ended the week up 4 bps at 1.53%. Ten-year yields added a basis point to 2.87%. Long bond yields slipped 2 bps to 3.87%. Benchmark Fannie MBS yields increased one basis point to 3.52%. The spread between benchmark MBS and 10-year Treasury yields was little changed at 65 bps. The implied yield on December 2014 eurodollar futures was 3 bps higher to 0.385%. The two-year dollar swap spread was little changed at 10 bps, and the 10-year swap spread was little changed at 6 bps. Corporate bond spreads were mixed. An index of investment grade bond risk was unchanged at 70 bps. An index of junk bond risk increased one to 342 bps. An



index of emerging market (EM) debt risk dropped 10 bps to 322 bps.

Debt issuance remained strong. Investment grade issuers included Devon Energy $2.25bn, John Deere Capital $1.25bn, Time Warner $1.0bn, SLM Corp $1.0bn, Discover Bank $1.0bn, Cameron International $750 million, Crane $550 million, Arch Capital $500 million, Massmutal Grobal $250 million, APX Group $250 million, and CubeSmart LP $250 million.

Junk bond funds saw small inflows of $16 million (from Lipper). I big week of junk issuance included Sprint $2.5bn, Rockwell Collins $1.1bn, Ashtead Captial $900 million, Salix Pharmaceuticals $750 million, Endo Finance $700 million, Inventive Health $625 million, Opal Acquisition $610 million, Walter Investment $575 million, Ashton Woods $350 million, Kenan Advantage Group $350 million, Memorial Resource Development $325 million, Churchill Down $350 million, Simmons Food $315 million, Tesoro Logistics LP $250 million, CTP Transportation Products $250 million, and Chassix $150 million.

Another long list of convertible debt issuers included Sunedison $1.0bn, Yandex $600 million, American Realty Capital $600 million, Arch Coal $350 million, Alpha Natural Resources $300 million, Finisar $220 million, Trulia $200 million, and E-House China Holdings $135 million.

International dollar debt issuers included Digicel $2.0bn, Societe Generale $1.75bn, Bank of Novia Scotia $1.75bn, Kommunalbanken $1.2bn, Jaguar Land Lover $700 million, Honduras $500 million, Neder Waterschapsbank $500 million, Trinidad & Tobago $350 million, Eletson Holdings $300 million, and Grupo Idesa $300 million.

Ten-year Portuguese yields rose 4 bps to 5.98% (down 77bps y-t-d). Italian 10-yr yields fell 9 bps to 4.09% (down 41bps). Spain's 10-year yields declined 7 bps to 4.09% (down 118bps). German bund yields slipped one basis point to 1.83% (up 51bps). French yields declined 2 bps to 2.43% (up 43bps). The French to German 10-year bond spread narrowed one to 60 bps. Greek 10-year note yields were down 13 bps to 8.58% (down 189bps). U.K. 10-year gilt yields were unchanged at 2.89% (up 107bps).

Japan's Nikkei equities index added 0.7% (up 48.2% y-t-d). Japanese 10-year "JGB" yields were up 3 bps to an almost 3-month high 0.69% (down 9bps). The German DAX equities index fell 1.8% (up 18.3%). Spain's IBEX 35 equities index was down 1.4% (up 13.5%). Italy's FTSE MIB fell 1.8% (up 9.4%). Emerging markets were under pressure. Brazil's Bovespa index fell 1.8% (down 17.9%), and Mexico's Bolsa dropped 1.7% (down 4.2%). South Korea's Kospi index lost 0.9% (down 1.7%). India’s Sensex equities index declined 1.3% (up 6.6%). China’s Shanghai Exchange sank 1.8% (down 3.2%).

Freddie Mac 30-year fixed mortgage rates declined 4 bps to 4.42% (up 110bps y-o-y). Fifteen-year fixed rates fell 4 bps to 3.43% (up 77bps). One-year ARM rates sank 8 bps to 2.51% (down 2bps ). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates rising 4 bps to 4.57% (up 62bps).

Federal Reserve Credit jumped $21.1bn to a record $3.905 trillion. Over the past year, Fed Credit was up $1.047 trillion, or 36.6%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $691bn y-o-y, or 6.4%, to a record $11.538 trillion. Over two years, reserves were up $1.255 trillion, for 12% growth.

M2 (narrow) "money" supply expanded $20.0bn to $10.954 trillion. "Narrow money" expanded 6.1% ($630bn) over the past year. For the week, Currency increased $7.7bn. Total Checkable Deposits rose $10.1bn, and Savings Deposits increased $3.1bn. Small Time Deposits declined $1.0bn. Retail Money Funds were little changed.

Money market fund assets increased $7.5bn to $2.710 trillion. Money Fund assets were up $64bn from a year ago, or 2.4%.

Total Commercial Paper jumped $31.6bn to $1.081 trillion. CP was up $32bn over the past year, or 3.1%.

Currency Watch
December 9 - Bloomberg (David Goodman): "Fund managers and electronic traders for the first time account for more than half the $5.3 trillion- a-day currency market as regulators investigate at least 11 dealers for alleged collusion on benchmark rates. Hedge funds, pension managers, central banks and smaller lenders made up 67% of the increase in daily trading, from about $4 trillion in 2010, the Bank for International Settlements said… Their share rose to 53% from 48%, while dealer banks, which buy and sell from clients, held steady with 39%."

The US dollar index was little changed at 80.21 (up 0.6% y-t-d). For the week on the upside, the Canadian dollar increased 0.5%, the South Korean won 0.5%, the Mexican peso 0.4%, the Swiss franc 0.3%, the South African rand 0.3%, the euro 0.3%, the Danish Krone 0.3% and the Brazilian real 0.1%. For the week on the downside, the Australian dollar declined 1.5%, the Swedish krona 1.1%, the Singapore dollar 0.5%, the British pound 0.3%, the Japanese yen 0.3%, the Norwegian krone 0.3%, and the New Zealand dollar 0.2%.

Commodities Watch
The CRB index added 0.4% this week (down 5.2% y-t-d). The Goldman Sachs Commodities Index declined 1.3% (down 3.6%). Spot Gold rallied 0.8% to $1,239 (down 26%). March Silver gained 0.4% to $19.60 (down 35%). January Crude fell $1.05 to $96.60 (up 5%). January Gasoline fell 3.6% (down 5%), while January Natural Gas jumped 5.8% (up 30%). March Copper gained 2.0% (down 9%). March Wheat fell 3.4% (down 19%), and March Corn dropped 2.0% (down 39%).

US Fixed Income Bubble Watch
December 11 - Bloomberg (Charles Stein): "Bond mutual funds are headed for record redemptions in 2013 amid signals the US Federal Reserve will reduce its stimulus. Investors have removed $70.7 billion so far this year from bond funds, TrimTabs Investment Research said… Unless the trend reverses, the redemptions would surpass a record $62.5 billion that investors removed from bond mutual funds in 1994… Investors have been pulling money from bond funds since May, when Federal Reserve Chairman Ben S. Bernanke first hinted that the central bank might begin scaling back its unprecedented asset purchases. The yield on the 10-year Treasury note is 2.8%, up from 1.93% on May 21, the day before Bernanke spoke about the possibility of tapering its stimulus."

December 10 - Bloomberg (Sarika Gangar): "Sales of investment-grade corporate bonds in the US reached an all-time high for a second straight year as issuers took advantage of borrowing costs that touched record lows to offer deals of unprecedented size. Deere & Co.’s $1.25 billion offering today sent sales for the year to $1.125 trillion, exceeding the $1.122 trillion in 2012… Last week, dollar-denominated high-yield offerings also reached an annual record, pushing US corporate bond sales to the most ever."

December 11 - Bloomberg (Sarika Gangar and Matt Robinson): "Back-to-back records for US investment-grade bond sales probably will fall short of a trifecta next year as the Federal Reserve curtails stimulus that’s fueled $5 trillion of issuance since the end of 2008. Strategists at JPMorgan Chase & Co., the largest arranger of the debt, project about a 1% drop in 2014 issuance while second-ranked Bank of America Corp. expects sales to plummet 16%. Barclays Plc estimates an 8% decline."

December 9 - Bloomberg (Katie Linsell): "Record sales of high-yield payment- in-kind bonds is triggering uneasiness among international regulators who are concerned investors may suffer losses when central banks tighten monetary policy. Issuance of the notes, which give borrowers the option to repay interest with more debt, more than doubled this year to $16.5 billion from $6.5 billion in 2012… About 30% of issuers before the 2008 financial crisis have since defaulted…"

December 12 - Bloomberg (Michael B. Marois and Michelle Kaske): "Puerto Rico’s general-obligation bond rating may be lowered to junk, Moody’s… said, if the commonwealth’s finances continue to deteriorate and it isn’t able to access credit markets soon. Moody’s said its decision to put the island’s credit under review would affect $52 billion of rated debt… Puerto Rico’s securities are held by more than three-quarters of mutual funds that invest in municipal bonds, according to Morningstar… The territory’s ‘weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy,’ Moody’s said…"

Federal Reserve Watch
December 9 - Bloomberg (Elizabeth Campbell and Aki Ito): "Federal Reserve Bank of Dallas President Richard Fisher said the US central bank should begin dialing back its asset purchases as soon as possible in an economy that doesn’t need any more monetary stimulus. ‘We should get started as soon as possible,’ Fisher said…, referring to when the Fed should begin reducing the pace of its bond buying. The economy has ‘enough firepower already if it’s properly used.’ …Fisher… repeated his view that the Federal Open Market Committee should announce a ‘clear and defined path’ that informs the public how the committee intends to slow and end the so-called quantitative easing program… The Dallas Fed chief said he’s becoming concerned about rising housing prices. ‘I wouldn’t say it’s nationwide, but in certain areas, we’re beginning to see a little bit of a boil. There’s beginning to be a little bit of turbulence in terms of affordability.’"

December 9 - Bloomberg (Steve Matthews and Aki Ito): "Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year, said the odds of tapering bond purchases have risen along with gains in the labor market, and any reduction should be modest to account for low inflation. ‘A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014,’ Bullard, a supporter of record stimulus, said… ‘Should inflation not return toward target, the committee could pause tapering at subsequent meetings.’"

December 11 - Bloomberg (Joshua Zumbrun and Caroline Salas Gage): "Federal Reserve officials are renewing a debate over cutting interest paid to banks on excess reserves, a move aimed at convincing investors that tapering its bond-buying isn’t the same as tightening its monetary policy. Lowering the rate, now 0.25%, is among ‘ideas that are still in play’ as the central bank seeks to improve the way it communicates the outlook for interest rates, Atlanta Fed President Dennis Lockhart said… The debate was revived as the Fed successfully tests a new policy involving so-called reverse repurchase transactions that would give it greater control over short-term borrowing costs. That may ease concern that cutting the interest rate on excess reserves could wreak havoc by pushing rates to zero or lower in money markets."

December 12 - Bloomberg (Joshua Zumbrun and Rich Miller): "Stanley Fischer, said to be the leading candidate for the No. 2 job at the Federal Reserve, offers crisis-fighting experience and a dose of skepticism about efforts to shape expectations on the outlook for interest rates. The former Bank of Israel governor, though a newcomer to the Fed, also brings continuity and strong academic credentials: as a professor of economics at Massachusetts Institute of Technology, he taught Fed Chairman Ben S. Bernanke, whose term ends in January, and European Central Bank chief Mario Draghi."

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