Page 2 of 4 CREDIT BUBBLE BULLETIN Terminal phases
Commentary and weekly watch by Doug Noland
Debt issuance slowed. Investment grade issuers included WM Wrigley $3.0 billion, Leucadia National $750 million, and Packaging Corp of America $700 million.
Junk bond funds saw inflows increase to $626 million (from Lipper). This week's issuers included Bank of America $3.0 billion, Mariposa $1.56 billion, Dominion Gas Holdings $1.2 billion, Calpine $750 million, CSX $500 million, Audatex North America $476 million, KB Home $450 million, Gray Television $375 million, and Allied Specialty Vehicles $200 million.
Convertible debt issuers included Solarcity $200 million, Resource
Capital Group $100 million and Aegean Marine Petroleum $75 million.
International dollar debt issuers included BPCE $1.5 billion, Comision Federal de Electricidad $1.25 billion, MMC Finance $1.0 billion, OAS Investment $875 million, Global A&T Electronics $500 million and Modernland Overseas $150 million.
Ten-year Portuguese yields increased 2 bps to 6.15% (down 60 bps year-to-date). Italian 10-yr yields fell 11 bps to 4.16% (down 34 bps). Spain's 10-year yields declined 4 bps to 4.24% (down 103 bps). German bund yields slipped 3 bps to 1.83% (up 51 bps). French yields declined 3 bps to 2.34% (up 34 bps). The French to German 10-year bond spread was unchanged at 51 bps. Greek 10-year note yields sank another 46 bps to 8.19% (down 228 bps). U.K. 10-year gilt yields were down 2 bps to 2.71% (up 89 bps).
Japan's Nikkei equities index gained 1.1% (up 40.1% year-to-date). Japanese 10-year "JGB" yields dropped 4 bps to to 0.61% (down 17 bps). The German DAX equities index rose 1.6% to a record high (up 16.5%). Spain's IBEX 35 equities index jumped 3.5% to a two-year high (up 22.5%). Italy's FTSE MIB rose 2.1%, also to a two-year high (up 18.4%). Emerging markets were mostly higher. Brazil's Bovespa index rallied 4.2% (down 9.1%), while Mexico's Bolsa declined 1.4% (down 7.5%). South Korea's Kospi index gained 1.4% (up 2.8%) to the high since July 2011. India's Sensex equities index jumped 1.7% (up 7.5%) to a near all-time high. China's Shanghai Exchange fell 1.5% (down 3.3%).
Freddie Mac 30-year fixed mortgage rates rose 5 bps to 4.28% (up 91 bps year-on-year). Fifteen-year fixed rates were up 2 bps to 3.33% (up 77 bps). One-year ARM rates dipped a basis point to 2.63% (up 3 bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates 2 bps higher to 4.51% (up 48 bps).
Federal Reserve Credit jumped $51.1 billion to a record $3.762 trillion. Over the past year, Fed Credit was up $942 billion, or 33.4%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $662 billion year-on-year, or 6.2%, to a record $11.415 trillion. Over two years, reserves were up $1.192 billion, for 12% growth.
M2 (narrow) "money" supply jumped $25.7 billion to a record $10.905 trillion. "Narrow money" expanded 7.1% ($723 billion) over the past year. For the week, Currency declined $1.7 billion. Total Checkable Deposits fell $47.1 billion, while and Savings Deposits surged $71.9 billion. Small Time Deposits were little changed. Retail Money Funds added $2.9 billion.
Money market fund assets sank $52.3 billion to a 10-week low $2.613 trillion. Money Fund assets were up $45 billion from a year ago, or 1.8%.
Total Commercial Paper dropped $32.0 billion to $1.034trillion. CP was down $31.9 billion year-to-date, while increasing $90.0 billion, or 9.5%, over the past year.
October 17 - Reuters (Wayne Arnold and Leika Kihara): "Deal or no deal, the US Congress' dance with default impressed policymakers and investors in China and Japan with just how vulnerable their own economic revival plans are to the next political tantrum on Capitol Hill… 'We're glad a deal has been struck,' said a Japanese policymaker… 'But the uncertainty will remain and it will be the same thing all over again early next year.' He and other Japanese officials say they have already developed contingency plans that include flooding Japan's banking system with cash to keep markets functioning however panicked investors become. And analysts say China, whose Communist leaders are due to hold a key policy meeting next month, may step up a push for global acceptance of its currency, the yuan or renminbi, as an alternative to the US dollar in international trade."
October 18 - Bloomberg (Fion Li): "The yuan had its biggest weekly gain in a year as data showed China's economic expansion accelerated in the third quarter. The currency climbed to a 20-year high today after the People's Bank of China boosted its fixing by 0.1% to 6.1372 per dollar, the strongest since a peg to the greenback ended in 2005."
The US dollar index declined 0.9% to 79.65 (down 0.1% year-to-date). For the week on the upside, the Australian dollar increased 2.2%, the New Zealand dollar 2.2%, the Norwegian krone 1.7%, the British pound 1.3%, the Swiss franc 1.1%, the South African rand 1.1%, the Danish krone 1.1%, the euro 1.1%, the Mexican peso 1.1%, the South Korean won 1.0%, the Swedish krona 0.9%, the Japanese yen 0.9%, the Canadian dollar 0.6%, the Singapore dollar 0.5%, the Brazilian real 0.2% and the Taiwanese dollar 0.1%.
The CRB index was little changed (down 2.7% year-to-date). The Goldman Sachs Commodities Index was unchanged (down 1.2%). Spot Gold rallied 3.5% to $1,316 (down 21%). Silver gained 3.1% to $21.91 (down 28%). November Crude fell $1.21 to $100.81 (up 10%). November Gasoline added 0.2% (down 3%), while November Natural Gas slipped 0.3% (up 12%). December Copper increased 0.9% (down 10%). December Wheat rallied 2.0% (down 9%), and December Corn recovered 1.9% (down 37%).
US Fixed Income Bubble Watch
October 16 - Bloomberg (Lisa Abramowicz): "Corporate bonds that lost $214 billion of market value in the second quarter are being tossed a lifeline on speculation Congress's fiscal turmoil will prompt the Federal Reserve to maintain its stimulus longer than analysts anticipated. JPMorgan Chase & Co.'s chief market strategist is recommending credit investments as a stalemate among US lawmakers shut down parts of the US government… As recent as last month, the JPMorgan strategists led by Jan Loeys were bearish on the debt. Investors funneled $1.6 billion into US investment-grade funds last week, the most in almost three months, after yanking as much as $2.4 billion in June…"
October 17 - Bloomberg (Brian Chappatta): "The $188 billion market for Build America Bonds is set to trail the rest of municipal debt for the first time as issuers face cuts to their federal subsidies while investors bet interest rates will rise. The taxable debt created under President Barack Obama's 2009 stimulus plan has lost 6.1% this year, compared with a 3.7% drop for the $3.7 trillion municipal market…"
Federal Reserve Watch
October 15 - Bloomberg (Joshua Zumbrun and Eric Martin): "Federal Reserve Bank of New York President William C. Dudley said central banks can fend off political interference by using unconventional policies to spur economic growth. 'The best way for central banks to maintain their independence is to use all their available monetary policy tools to best achieve their objectives,' Dudley said… 'I do not see the use of these tools as creating significant new risks to our independence.'"
October 17 - Dow Jones (Michael S. Derby): "Federal Reserve official clashed again over the likely path of monetary policy in speeches Thursday. The officials who spoke over the course of the day included Chicago Fed leader Charles Evans and Kansas City Fed chief Esther George… 'I expect our overall stance of monetary policy to remain highly accommodative for some time to come,' Mr. Evans said… 'It is not yet time to remove accommodation. The data are still not definitive enough to say that now is time to adjust' the pace of the Fed's ongoing bond-buying stimulus program, the official said… The shutdown has also broken the stream of government-generated data the Fed needs to make a choice on policy. 'Only the data can tell us how much progress we've made, and they aren't saying much right now: The data available in September were inconclusive, and since then, incoming information has been silenced with the federal government shutdown,' Mr. Evans said. Ms. George, who has dissented at every FOMC meeting this year, took the opposing view in the debate. 'The benefits of quantitative easing have been quite small, and the potential costs of the program grow each month as we buy those assets,' Ms. George said… When it comes to cutting the pace of the purchases, 'it would be important to start now, to start slowly to allow markets time to adjust, to recognize this is likely to be a long process in terms of unwinding' the bond purchases…"
October 17 - Bloomberg (Vivien Lou Chen): "Fed officials must do 'whatever it takes' to push for faster return to full employment while keeping inflation near 2%, including possibly providing more stimulus, Minneapolis Fed Pres. Narayana Kocherlakota said. Fed should keep current stimulus in place even if asset prices rise to unusually high levels, leading to concerns about 'bubbles,' Kocherlakota said… 'It may not be easy to stick to this path,' yet benefits in terms of employment gains 'will be significant'… 'Doing whatever it takes in the next few years' means FOMC 'is willing to continue to use the unconventional monetary policy tools that it has employed'… Low levels of inflation show FOMC has 'lot of room' to provide 'much needed stimulus to the labor market'… there's 'considerable monetary policy capacity'…"
Central Bank Watch
October 16 - Bloomberg (Theophilos Argitis): "Canadian Finance Minister Jim Flaherty's criticism of US monetary policy, which he ramped up last week in Washington, may be putting him at odds with the Bank of Canada and the Group of 20. Flaherty said he criticized the Federal Reserve's use of unconventional monetary policy known as quantitative easing at a private dinner of G-20 officials on Oct. 10, with US Federal Reserve Chairman Ben S. Bernanke in attendance. 'I was fairly clear' at the meeting, Flaherty told reporters… 'It's not good public policy,' he said, describing quantitative easing as 'the printing of money.' The comments raise questions about how Canada would respond if the global economy faced a shock… The central bank would need the consent of the finance department to pursue [quantitative easing] because it could require the bank to buy riskier assets than usual."
US Bubble Economy Watch
October 18 - Washington Times (Stephen Dinan): "US debt jumped a record $328 billion on Thursday, the first day the federal government was able to borrow money under the deal President Obama and Congress sealed last week. The debt now equals $17.075 trillion, according to figures the Treasury Department posted online on Friday. The $328 billion increase shattered the previous high of $238 billion set two years ago. The giant jump comes because the government was replenishing its stock of 'extraordinary measures' - the federal funds it borrowed from over the last five months as it tried to avoid bumping into the debt ceiling. Under the law, that replenishing happens as soon as there is new debt space. In this case, the Treasury Department borrowed $400 billion from other funds beginning in May, awaiting a final deal from Congress and Mr. Obama."
October 14 - Bloomberg (Thomas Black): "Prospects for a recovery in US corporate profits this year are dimming after third-quarter earnings growth slowed and the federal government's shutdown hindered trade and threatened to crimp consumer spending. Earnings rose an estimated 1.4% for Standard & Poor's 500 Index companies last quarter, trailing gains of 3.8% in the previous three months and an average 10% over 15 years. Analysts have reduced the quarterly estimate by 75% since June…"