Page 2 of 4 CREDIT BUBBLE BULLETIN The makings for a major top
Commentary and weekly watch by Doug Noland
The bubble has spurred excessive issuance and mispricing in high-risk junk bonds, leveraged loans and risky municipal debt. It has also spurred massive over-issuance of perceived high-quality Treasury securities and ''money-like'' debt instruments. It has spurred a boom in perceived liquid and low-risk ETF products, funds that loaded up on illiquid securities as ''money'' flooded in. It has fueled record assets in hedge funds and sovereign wealth funds. It has spurred incredible concentration of assets in the hands of a group of sophisticated financial operators most adept at playing policy-driven speculative markets.
As an analyst of bubbles, I readily admit it is impossible to
accurately predict the timing of their demise. Even in hindsight, I have no idea why technology stocks put in bubble highs in March of 2000. It's not clear why stocks peaked again when they did in 2007.
It's never been clear to me why the US equities bubble cracked when it did in late-1929. But all those major market tops were put in after speculative market melt-ups pushed the divergence between inflated securities price bubbles and deteriorating fundamentals to precarious extremes. And all three speculative melt-ups were fueled in part by powerful short squeezes, squeezes made possible by traders shorting securities in response to deteriorating fundamental backdrops. A similar environment exists for a major top in 2013.
The S&P500 added 0.5% (up 16.6% y-t-d), while the Dow declined 0.5% (up 14.6%). The S&P 400 MidCaps jumped 1.0% (up 19.3%), and the small cap Russell 2000 rose 1.4% (up 22.2%). The Morgan Stanley Consumer index slipped 0.2% (up 20.9%), while the Utilities increased 0.2% (up 5.8%). The Banks increased 0.3% (up 26.6%), and the Broker/Dealers advanced 1.3% (up 42.7%). The Morgan Stanley Cyclicals were down 0.4% (up 20.0%), while the Transports were up 1.7% (up 22.1%). The Nasdaq100 surged 1.6% (up 17.4%), while the Morgan Stanley High Tech index slipped 0.1% (up 14.7%). The Semiconductors gained 0.3% (up 20.8%). The InteractiveWeek Internet index rose 0.7% (up 22.9%). The Biotechs surged 3.5% (up 34.1%). With bullion gaining $21, the HUI gold index was up 0.6% (down 38.6%).
One-month Treasury bill rates ended the week at one basis point and three-month bill rates closed at 3 bps. Two-year government yields increased 4 bps to 0.38%. Five-year T-note yields ended the week up 6 bps to 1.62%. Ten-year yields slipped a basis point to 2.82%. Long bond yields declined 5 bps to 3.79%. Benchmark Fannie MBS yields declined 3 bps to 3.60%. The spread between benchmark MBS and 10-year Treasury yields narrowed 2 to 78 bps. The implied yield on December 2014 eurodollar futures jumped 5 bps to 0.71%. The two-year dollar swap spread was little changed at 18 bps, while the 10-year swap spread rose about 3 to 19 bps. Corporate bond spreads were mostly narrower. An index of investment grade bond risk declined 2 to 79 bps. An index of junk bond risk dropped 19 to 387 bps. An index of emerging market (EM) debt risk jumped 23 to 345 bps.
Debt issuance slowed. Investment grade issues included PNC $750 million, Southern Co $500 million, Pricoa Global Funding $500 million, DTE Electric $400 million, Entergy Louisiana $325 million, and Western Union $250 million.
Junk bond funds suffered outflows of $2.33bn (from Lipper). Junk issuers this week included Northshore RE $200 million and Beazer Homes $200 million.
Convertible debt issuers included B2Gold Corp $225 million and Spansion $200 million.
International dollar debt issuers included Sweden $3.0bn, Interamerican Development Bank $2.0bn, Korea Development Bank $1.0bn, Abbey National $1.0bn and Metrocat RE $200 million.
Ten-year Portuguese yields rose 6 bps to 6.43% (down 32bps y-t-d). Italian 10-yr yields jumped 14 bps to 4.32% (down 18bps). Spain's 10-year yields rose 8 bps to 4.44% (down 83bps). German bund yields increased 5 bps to 1.93% (up 61bps), and French yields jumped 8 bps to 2.47% (up 47bps). The French to German 10-year bond spread widened 3 to 54 bps. Greek 10-year note yields gained 16 bps to 9.78% (down 69bps). U.K. 10-year gilt yields were unchanged at 2.70% (up 88bps).
Japan's Nikkei equities index ended the week little changed (up 31.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.76% (down 2bps). The German DAX equities index added 0.3% for the week (up 10.6%). Spain's IBEX 35 equities index fell 1.5% (up 6.4%). Italy's FTSE MIB lost 1.9% (up 6.6%). Emerging markets were mostly lower. Brazil's Bovespa index gained 1.3% (down 14.4%), while Mexico's Bolsa was slammed for 2.7% (down 6.4%). South Korea's Kospi index dropped 2.6% (down 6.4%). India's Sensex equities index declined 0.4% (down 4.7%). China's Shanghai Exchange fell 0.5% (down 9.3%).
Freddie Mac 30-year fixed mortgage rates surged 18 bps to a two-year high 4.58% (up 92bps y-o-y). Fifteen-year fixed rates rose 16 bps to 3.60% (up 71bps). One-year ARM rates were unchanged at 2.67% (up one bp). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 11 bps to 4.75% (up 49bps).
Federal Reserve credit jumped $24.1bn to a record $3.590 TN. Fed credit expanded $804bn during the past 46 weeks. Over the past year, Fed credit was up $779bn, or 27.7%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $652bn y-o-y, or 6.2%, to a record $11.185 TN. Over two years, reserves were $1.049 TN higher, for 10% growth.
M2 (narrow) "money" supply declined $23.5bn to $10.761 TN. "Narrow money" expanded 7.0% ($707bn) over the past year. For the week, Currency increased $1.2bn. Total Checkable deposits dropped $35.0bn, while Savings Deposits expanded $9.3bn. Small Time Deposits slipped $0.9bn. Retail Money Funds increased $1.7bn.
Money market fund assets increased $15.5bn to $2.637 TN. Money Fund assets were up $64bn from a year ago, or 2.5%.
Total Commercial Paper outstanding jumped $16.7bn this week to $1.020 TN. CP has declined $45.2bn y-t-d and $0.5bn, or 0.4%, over the past year.
Currency and 'Currency War' Watch
August 23 - Bloomberg (Matthew Malinowski and Blake Schmidt): ''Brazil's real posted its biggest gain in almost two years as the central bank stepped up efforts to stem the world's worst currency decline, announcing a $60 billion intervention program involving swaps and loans. The real climbed 3.7% to 2.3488 per dollar in Sao Paulo, paring its decline in the past three months to 13%, still the biggest among 31 major dollar counterparts tracked by Bloomberg.''
The US dollar index was little changed at 81.36 (up 2.0% y-t-d). For the week on the upside, the Brazilian real increased 1.9%, the Swedish krona 0.5%, the Swiss franc 0.5%, the euro 0.4% and the Danish krone 0.4%. For the week on the downside, the New Zealand dollar declined 3.7%, the Australian dollar 1.7%, the Norwegian krone 1.7%, the Canadian dollar 1.5%, the South African rand 1.5%, the Japanese yen 1.2%, the Singapore dollar 0.7%, the British pound 0.4%, the Mexican peso 0.4%, the South Korean won 0.3% and the Taiwanese dollar 0.3%.
The CRB index slipped 0.6% this week (down 1.4% y-t-d). The Goldman Sachs Commodities Index was little changed (up 0.4%). Spot Gold gained 1.5% to $1,398 (down 16.6%). Silver jumped 1.7% to $23.78 (down 21%). October Crude declined 87 cents to $106.42 (up 16%). September Gasoline gained 1.3% (up 9%), and September Natural Gas added 0.1% (up 4%). December Copper slipped 0.3% (down 8%). September Wheat rallied 0.6% (down 18%), and September Corn jumped 4.6% (down 29%).
US Fixed Income Bubble Watch
August 22 - Wall Street Journal (Katy Burne): ''Investors have yanked $30.3 billion from US-listed bond mutual funds and exchange-traded funds this month, marking the third-largest monthly outflow in records going back to 1984, according to estimates by TrimTabs ... The August moves come on the heels of a record $69.1 billion monthly outflow in June and a $14.8 billion outflow in July. Before June, bond funds posted inflows for 21 consecutive months. Some $1.2 trillion of investor funds flowed into bond funds between 2009 and 2012.''
August 19 - Bloomberg (Liz Capo McCormick and Anchalee Worrachate): ''Regulations aimed at reducing the risk of another financial crisis are starting to upend a key part of the bond market that expedites trading in everything from Treasuries to junk bonds. The US repurchase, or repo, market where banks and investors borrow and lend Treasuries and other fixed-income securities shrunk to $4.6 trillion daily outstanding last month, down 35% from a peak of $7.02 trillion in the first quarter of 2008 ... From fewer repos to lower inventories of bonds, financial institutions are responding to more stringent capital standards imposed by regulators around the world. Already, the group of dealers and investors that advise the US Treasury say that they see declines in liquidity in times of market stress, including wider gaps between bid and offer prices and the speed of completing trades ... 'During the market selloff over the past few months, those rules, a lot of which are just proposed or not yet taken effect, already impacted dealers' willingness to take on inventory of Treasuries, investment grade corporates to emerging market debt,' Gregory Whiteley, who manages government debt investments at ... DoubleLine Capital LP, which oversees $57 billion, said ... 'That exacerbated the intensity of the selloff.'''
August 23 - Bloomberg (Matt Robinson): ''Losses this month in fixed-income markets are making 2013 among the worst years on record for US investment-grade corporate bonds, even exceeding 1994 when the Federal Reserve shocked investors by doubling benchmark interest rates in 12 months. A 1.8% decline in August in the Bank of America Merrill Lynch US Corporate Index brings losses for the year to 4.3%. That contrasts with a 17.8% return in the Standard & Poor's 500 Index and marks the biggest underperformance for bonds since 1999, when they lost 1.9% while shares soared 21% including reinvested dividends.''
August 22 - Bloomberg (Michelle Kaske): ''The largest exchange-traded fund tracking the $3.7 trillion municipal-bond market is selling for less than the value of its holdings for a record stretch as demand for local debt sinks to the lowest level in more than two years. The $3.2 billion iShares S&P National AMT-Free Municipal Bond Fund, known as MUB, traded at a discount to its net asset value for 61 straight days through Aug. 21 ... ''
August 19 - Bloomberg (Sridhar Natarajan and Lisa Abramowicz): ''Leveraged loans are becoming more volatile as they attract unprecedented cash from investors seeking debt that offers protection from rising interest rates. Loan prices have swung 11.92 cents on the dollar since the end of 2010, compared with a 1.5-cent fluctuation in the three years ended Dec. 31, 2006 ... Mutual and exchange-traded funds that focus on the floating-rate debt have attracted about $45.5 billion of new money this year, increasing their assets by 60%... While the flows have helped speculative-grade companies refinance and lower rates on more than $300 billion of existing loans, concern is rising that the cash could flow out just as quickly, causing borrowing costs to soar. Mutual funds and ETFs now own about 20% of the US leveraged-loan market, about the most ever, and may contribute to bigger price swings going forward, according to Fitch Ratings. 'I don't think it's all going to be smooth sailing,' Darin Schmalz, a director at Fitch in Chicago, said ... . 'Looking at loans over time, it was a pretty stable asset class. We found out this can be a volatile asset class.'''
August 21 - Bloomberg (Brian Chappatta): ''Michigan's Finance Authority is offering an interest rate 14 times higher than that on top-rated bonds to sell $92 million of one-year notes for Detroit's public schools. Today's deal is the first tied to the Motor City since it sought bankruptcy protection July 18. The bonds are backed by state aid payments. The securities maturing in August 2014 are being offered with a preliminary yield of 4.5%... That compares with a 0.32% interest rate on benchmark AAA munis due in one year.''