Page 1
of 5 CREDIT
BUBBLE BULLETIN Clash of the
paradigms By Doug Noland
Ongoing uncertainties left the stock
market mixed for the final week of the quarter.
The Dow increased 0.6% (up 11.5% y-t-d), while the
S&P500 was little changed (up 7.6%). The
Utilities were hit for 1.6% (up 8.0%), while the
Morgan Stanley Consumer index gained 0.8% (up
7.4%). The Morgan Stanley Cyclical index increased
0.5% (up 18.8%), and the Transports added 0.2% (up
6.1%). The broader market appeared increasingly
vulnerable. The small cap Russell 2000 declined
0.9% (up 2.3%), while the
S&P400 Mid-cap index
gained 0.4% (up 10.0%). The high-flying NASDAQ100
jumped 2%, increasing y-t-d gains to 19.0%. The
Morgan Stanley High Tech index rose 1.6% (up
17.6%), while the Semiconductors dipped 0.2% (up
6.9%). The Street.com Internet Index gained 1.4%
(up 17.3%), and the NASDAQ Telecommunications
index surged 2.7% (up 23.1%). The Biotechs were
little changed (up 8.9%). Financial stocks again
underperformed. The Broker/Dealers slipped 0.6%
(down 4.6%), and the Banks dropped 2.3% (down
9.8%). Although Bullion rose another $11.60, the
HUI Gold index declined 1.7% (up 16.2%).
Will the weak dollar finally place a floor
under U.S. yields? Three-month T-bill rates rose 4
bps this week to 3.80%. At the same time, two-year
U.S. government yields declined 6.5 bps to 3.97%,
and five-year yields fell 5.5 bps to 4.24%.
Ten-year Treasury yields declined 4.5 bps to
4.58%, and long-bond yields ended the week 4.5 bps
lower at 4.83%. The 2yr/10yr spread ended the week
at 61 bps. The implied yield on 3-month December
’07 Eurodollars jumped 11 bps to 4.83%. Benchmark
Fannie Mae MBS yields added 2 bps to 5.965%, this
week underperforming Treasuries. The spread on
Fannie’s 5% 2017 note narrowed 4 to 42, and the
spread on Freddie’s 5% 2017 note narrowed about 3
to 43. The 10-year dollar swap spread declined 1.8
to 62.5. Corporate bond spreads were mixed. The
spread on a junk index ended the week 7 bps wider.
September 27 – Financial Times
(Stacy-Marie Ishmael): “The global market for
credit derivatives grew 32% in the first half and
increased 75% over the year to the end of June,
the slowest rate of growth since 2003. Credit
derivatives volumes outstanding rose by almost a
third, to $45,460bn at June 30 from $34,420bn at
the end of last year, the International Swaps and
Derivatives Association said… Over the same period
last year, the notional volume of contracts
outstanding more than doubled… Contracts to swap
between fixed and floating interest payments, the
biggest component of the over-the-counter
derivatives markets, increased 38% to $347,100bn
over the year to June 30... Volumes in equity
derivatives…grew 40% in the first half, and are up
57% over the past year, to $10,100bn.”
September 28 – Bloomberg (Sarah Rabil):
“Bear Stearns Cos….and newspaper owner Quebecor
Media Inc. led companies selling U.S. bonds this
week, taking advantage of an easing in the credit
rout that roiled sales in July and August. U.S.
corporate bond offerings reached $25.6 billion
this week, Bloomberg data show, pushing September
issuance to a record $112 billion.”
Junk issuers included USG $500
million, American Tower $500 million, Range
Resources $250 million, Downstream Development
$200 million, Waterford Gaming $130 million, MCBC
Holdings $105 million, and Standard Pacific $100
million.
Convert issuers included USEC
$575 million and General Cable $475 million.
Foreign dollar bond issuance included
Mexico $3.5bn, Royal Bank of Scotland $3.1bn,
ICICI Bank $2.0bn, Turkey $1.25bn, Ghana $750
million, Corp Durango $520 million, and Grupo
Senda $150 million.
German 10-year bund
yields dipped 3 bps to 4.32%, as the DAX equities
index added 1.1% (up 19.4% y-t-d). Japanese
10-year “JGB” yields were unchanged at 1.675%. The
Nikkei 225 rallied 2.3% (down 2.6% y-t-d). Most
emerging debt and equities Bubbles took on
additional air. Brazil’s benchmark dollar bond
yields fell almost 5 bps to 5.85%. Brazil’s
Bovespa equities index jumped 4.6% to a record
high (up 36% y-t-d). The Mexican Bolsa declined
0.9% (up 14.5% y-t-d). Mexico’s 10-year $ yields
rose 8.5 bps to 5.63%. Russia’s RTS equities index
gained 2.2% (up 7.8% y-t-d). India’s Sensex
equities index surged 4.4% to an all-time high (up
25.4% y-t-d and 40% y-o-y). China’s Shanghai
Composite index gained 1.7% to another record high
(up 108% y-t-d and 220% y-o-y).
September
25 - Financial Times (Joanna Chung): “Emerging
market equities are defying the financial turmoil.
Having staged a dramatic recovery in the past
month, more than recouping the losses suffered
over the summer, emerging market share prices
yesterday pushed to an all-time high to stand 28%
above the low seen on August 16, as measured by
the MSCI emerging markets index. But this
spectacular performance of assets that usually
retreat in times of crisis has raised questions
about whether a bubble is developing in emerging
markets. Those questions have been fuelled by the
US Federal Reserve's interest rate cut last week,
which triggered a strong rally in stock markets
globally. Rate cuts have produced bubbles before.
One of the unintended consequences of monetary
easing during the credit market crises of the late
1980s and the late 1990s - following crises in
Latin America, Asia and Russia - were bubbles in
the Japanese equity market and the technology
stocks sector, said Michael Hartnett, emerging
market equity strategist at Merrill Lynch. ‘It’s
essentially 1998 in reverse,’ he said. ‘The credit
problem is now in the US rather than emerging
markets. So liquidity to ease the US credit
problem will be redirected towards emerging
markets just as liquidity to ease the Asian and
Russian financial crisis and problems stemming
from Long-Term Capital Management was redirected
toward technology.’”
Freddie Mac posted
30-year fixed mortgage rates jumped 8 bps this
week to 6.42% (up 11bps y-o-y). Fifteen-year fixed
rates rose 11 bps to 6.09% (up 11bps y-o-y).
Moving the other direction, one-year adjustable
rates fell 5 bps to 5.60% (up 13bps y-o-y).
A $53.5bn decline in Securities Credit
pushed Bank Credit $42.6bn lower for the week
(9/19) to $8.882 TN. Bank Credit is now up $241bn
over the past eight weeks, with a $585bn, or 9.7%
annualized, y-t-d gain. For the week, Loans &
Leases increased $10.9bn to a record $6.539 TN
(8-wk gain of $210bn). C&I loans jumped
$11.6bn, increasing the y-t-d growth rate to 20%.
Real Estate loans dropped $10bn. Consumer loans
rose $8.4bn. Securities loans declined $8.1bn,
while Other loans gained $9.0bn. On the liability
side, (previous M3) Large Time Deposits surged
$32.4bn.
M2 (narrow) “money” jumped
$18.9bn to a record $7.370 TN (week of 9/17).
Narrow “money” has expanded $327bn y-t-d, or 6.3%
annualized, and $487bn, or 7.1%, over the past
year. For the week, Currency was about unchanged,
while Demand & Checkable Deposits fell
$16.1bn. Savings Deposits surged $29.8bn, and
Small Denominated Deposits increased $4.4bn.
Retail Money Fund assets added $1.9bn.
Total Money Market Fund Assets (from
Invest. Co Inst) jumped $29.8bn last week to a
record $2.855 TN. Money Fund Assets have now
posted a 9-week gain of $271bn and a y-t-d
increase of $473bn (26.5% annualized). Money fund
asset have surged $637bn over 52 weeks, or 28.7%.
Total CP declined $13.7bn to $1.855 TN,
boosting the seven-week drop to $368bn.
Asset-backed CP fell $6.3bn (7-wk drop of $251bn)
to $922.6bn. Year-to-date, total CP is now down
$118.9bn, with ABCP declining $161.3bn. Over the
past year, Total CP has contracted $47bn, or 2.5%.
Asset-backed Securities (ABS) issuance
slowed to $5.7bn this week. Year-to-date total US
ABS issuance of $461bn (tallied by JPMorgan) is
now running 30% behind comparable 2006. At $210bn,
y-t-d Home Equity ABS sales are half of last
year’s pace. Year-to-date US CDO issuance of $261
billion is running only slightly ahead of 2006
sales.
Fed Foreign Holdings of Treasury,
Agency Debt last week (ended 9/26) gained $7.7bn
to $1.995 TN. “Custody holdings” were up $243bn
y-t-d (18.5% annualized) and $334bn during the
past year, or 20.1%. Federal Reserve Credit last
week jumped $6.6bn to $860bn. Fed Credit has
increased $7.4bn y-t-d and $34.3 over the past
year (4.2%).
International reserve assets
(excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi – were up $905bn y-t-d (25.1%
annualized) and $1.120 TN y-o-y (24.4%) to $5.716
TN.
Credit Market Dislocation Watch September 28 – Financial Times (Lina Saigol
and James Politi): “The global mergers and
acquisitions market reached a record $3,850bn over
the first nine months of the year as a whole, but
experienced a dramatic drop in the third quarter
as the credit markets seized up and buy-out
activity collapsed. The volume of deals worldwide
fell 42% to $1,000bn during the third quarter…
Dealogic…said.”
September 28 – Financial
Times (James Politi and Lina Saigol): “For a
while, it seemed that strategic buyers would try
to take advantage of private equity's immobility
by making acquisitions that they had long coveted
but decided not to pursue during the buy-out boom
for fear that they could be outbid. But those
hopes have not yet materialised. This is partly
because the credit squeeze has hurt confidence
across the board… According to Dealogic, global
M&A activity in August and September combined
was worth $417bn, only 73% of July’s volume of
$574.7bn… According to Dealogic, $119.8bn worth of
deals were announced in Brazil, Russia, India and
China - the highest quarterly total on record for
those countries. Latin American deal activity hit
$30.5bn - the second- highest quarterly total
after the second quarter of 2006.”
September 28 – Financial Times (David
Oakley): “The world of junk-rated corporate bonds
and leveraged loans came to a
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