Page 2 of 5 Tight 'money' Commentary and weekly review by Doug Noland
week, Currency dipped $1.0bn, and Demand & Checkable Deposits sank $23.2bn.
Savings Deposits surged $32.2bn, and Small Denominated Deposits added $0.1bn.
Retail Money Fund assets rose $9.2bn.
Total Money Market Fund Assets (from Invest. Co Inst) jumped $26.3bn last week
to a record $3.073 TN. Money Fund Assets have now posted an unprecedented
18-week surge of $489bn (58% annualized) and a y-t-d increase of $691bn (31.4%
annualized). Money fund assets have ballooned $744bn, or 31.9%, over the past
year.
Total Commercial Paper gained $12.7bn to $1.854 TN. CP is now down $369bn over
the past 16 weeks. Asset-backed CP declined $8.0bn (16-wk drop of $333bn) last
week to $841bn. Year-to-date, total CP has contracted $120bn, with ABCP down
$243bn. Over the past year, Total CP has declined $74bn, or 3.8%.
Asset-Backed Securities (ABS) issuance increased somewhat this week to a still
slow $3.5bn. Year-to-date total US ABS issuance of $513bn (tallied by JPMorgan)
is running 38% behind comparable 2006. At $219bn, y-t-d Home Equity ABS sales
are off 58% from last year’s pace. Year-to-date US CDO issuance of $290 billion
is now 16% below comparable 2006.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 11/28) increased
$5.7bn to $2.031 TN. "Custody holdings" were up $279bn y-t-d (17.3% annualized)
and $320bn during the past year, or 18.7%. Federal Reserve Credit expanded
$1.5bn last week to $869.6bn. Fed Credit has increased $17.4bn y-t-d and
$25.6bn over the past year (3.0%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi – were up $1.178 TN y-t-d (27% annualized) and $1.231 TN
year-over-year (26%) to a record $5.989TN.
Credit Market Dislocation Watch
November 30 – Bloomberg (Alison Vekshin and Craig Torres): "U.S. Treasury
Secretary Henry Paulson is negotiating an agreement with banks to stem a surge
in foreclosures by fixing interest rates on loans to subprime borrowers,
according to people familiar with a meeting he led yesterday. Paulson…presided
over a one-hour gathering at the Treasury Department…with federal regulators,
bankers and lobbyists. Citigroup Inc., Wells Fargo & Co. and Washington
Mutual Inc. executives attended, said a person present…"
November 28 – Financial Times (Stacy-Marie Ishmael): "Capital market issuance
in the US fell in the third quarter, hit by the ongoing upheaval in the credit
world, but municipal and investment grade corporate bond issuance remained
strong. A total of $1,330bn in securities was issued in the third quarter of
2007, compared with $1,920bn in the second and $1,510bn in the same quarter a
year earlier…the Securities Industry and Financial Markets Association [data]
showed."
November 26 – Financial Times (Gillian Tett, Jennifer Hughes and Krishna Guha):
"Investors fear the financial system is moving into new credit turmoil, which
could create further losses for financial institutions - and potentially hurt
sentiment in the ‘real’ economy. Credit markets are trading at levels which
imply that investors assume that the US is heading for a recession, bank
analysts and economists have warned. ‘Recession is getting priced in,’ said Jan
Loeys, economist at JPMorgan, adding that markets went into ‘virtual panic
mode’ last week. ‘Pressure is building for central banks to become a lot more
active and vocal [this] week if they want to avert a collapse in credit
markets.’… Peter Sutherland, chairman of both Goldman Sachs International and
BP, joined those voicing concern. ‘The US economy is in a mess… There is a
whole big issue...which has not fully played out in regard to providing credit
and liquidity to institutions, so I think it is a dangerous period for the
world. I think we are going to go through next year, certainly the first half
of next year, with considerable traumas.’"
November 28 – Financial Times (Michael Mackenzie and Saskia Scholtes):
"Investor flight from anything bearing the taint of the US subprime mortgage
crisis has pushed financial companies debt to its weakest versus US Treasuries
in more than five years. Energy, utilities and telecommunications companies,
conversely, have seen their lower-rated BBB bonds attract haven buying. This
divergence is a stark indicator of one root cause of the current credit crunch:
the unwinding of leverage on the part of investors. The paper rated AA that is
common to most financial companies was popular in many complex credit
structures using leverage. ‘The AA to BBB [performance] pattern suggests that
the fear is a massive liquidation trade that causes spread widening, rather
than weak balance sheets that cause default risk,’ said Michael Cloherty,
strategist at Banc of America… Structured investment vehicles (SIVs) – one
significant type of leveraged investor – are off-balance sheet vehicles that
hold long-term assets such as mortgage debt and corporate bonds… These were
huge buyers of financial company debt, which made up on average more than 40%
of their holdings."
November 29 – Financial Times (David Oakley): "The cost of borrowing in the
corporate bond markets rose to five-year highs yesterday as issuance for a
November slumped to a record low. Ben Bennett, credit strategist at Lehman
Brothers, said: ‘The markets are dead. It’s down to a mixture of investors
being reluctant to buy new deals and issuers reluctant to lock in at prices
that are some of the worst or widest for years. ‘The general market appetite
for any credit activity has taken a bit of a battering. People's appetite for
going long has been reduced greatly. No one wants to be doing big trades now.
The market has in general given up over the last two weeks.’ According to
figures from Lehman, the spread or risk premium for financial and corporate
bonds over safe government paper rose to the highest level yesterday in the
dollar denominated market since January 2003… Dealogic…said global bond
issuance in the US and Europe for November was at its lowest level since 2001.
Non-government bond issuance in the US is $106bn so far this month compared
with $327bn in November last year, while in Europe it is $124bn compared with
$247bn in November last year."
November 27– Dow Jones (Romy Varghese and Anusha Shrivastava):
"Investment-grade investors have gone into hiding, bringing the U.S. market for
highly rated debt to a virtual standstill. Risk premiums are wider in the
secondary market and primary issuance has dwindled to a trickle. Rattled by
worries about the outlook for the economy, the credit markets and the health of
the financial system, investors appear to have mostly closed up shop for the
year. Trading is ‘extremely illiquid,’ said Wayne Schmidt, senior portfolio
manager at AXA Investment Management. So much so, it’s worse than August, the
height of the summer credit crunch, he said. New issuance has sputtered out…"
November 27– Bloomberg (Jody Shenn): "Losses on collateralized debt obligations
at the world’s biggest banks may double to $77 billion, JPMorgan Chase &
Co. analysts predict. Losses marketwide on CDOs linked to U.S. mortgages will
reach about $260 billion…JPMorgan analysts, led by Christopher Flanagan said…
‘One of the benefits of securitization is the offloading and global
distribution of risk… Ironically, this is now a capital markets hazard, since
no one is sure where subprime losses lurk.’"
November 30 – Bloomberg (Shannon D. Harrington): "Moody’s Investors Service
said $64.9 billion of debt sold by Citigroup Inc.'s structured investment
vehicles was cut or placed on review for a downgrade as part of a review of
$130 billion of SIV debt."
November 26– Bloomberg (Neil Unmack and Sebastian Boyd): "HSBC Holdings Plc,
Europe’s largest bank, will add $45 billion of assets to its balance sheet by
consolidating two structured investment vehicles it manages. Investors in the
SIVs will be able to exchange their holdings for debt issued by a new company,
backed by loans from HSBC… HSBC’s decision reduces the worldwide assets in SIVs
as U.S. lenders led by Bank of America Corp. seek to persuade competitors to
help finance an $80 billion bailout of the companies. HSBC’s Cullinan Finance
Ltd. and Asscher Finance Ltd. have more than $34 billion of senior debt, making
it the second-largest bank sponsor of SIVs after Citigroup Inc."
November 27 – Financial Times (Stacy-Marie Ishmael and Saskia Scholtes):
"Specialist bond insurers are facing mounting pressure to improve their
financial standing and avoid losing their top credit ratings because of the
subprime mortgage crisis. But while much investor attention has been focused on
risks at the two biggest companies in the industry, MBIA and Ambac, analysts
say the bond insurers most at risk are the smaller, less established players
such as ACA, FGIC and Security Capital Assurance…. The cost of insuring FGIC
against default was more than 700 bps yesterday, according to Markit, about in
line with the cost of protecting General Motors, which is rated high yield."
November 29 – Washington Post (David Cho): "The widening credit crunch is
making it harder for cities and school systems to get money for buildings,
ballparks and other vital projects from the $2.5 trillion market for municipal
bonds, a sector of Wall Street that rarely sees trouble. That is leaving them
with a tough choice: either put off the projects, or pay higher interest rates
on their bonds… Faced with the prospect of paying higher interest rates this
month, Chicago canceled a $960 million bond. Miami-Date pulled a $540 million
offering for its airport… Several finance directors said it is unusual for
turbulence to hit municipal bonds, a tax-exempt investment that has long been
considered safe. ‘There’s some unique and maybe even unprecedented dynamics
that have been occurring because of the credit crunch,’ said Lasana Mack, the
District’s treasurer. For the past several years, cities and towns have been
able to borrow money by issuing bonds that pay historically low interest rates.
That era of easy money is ending for many municipalities, mostly because of
spiraling losses in the mortgage industry that have been driving up borrowing
costs."
November 27– Bloomberg (Michael B. Marois): "The worst U.S. housing recession
in 16 years will drive down property values by $1.2 trillion next year and
slash tax revenue by more than $6.6 billion, according to a report by the U.S.
Conference of Mayors. California… will suffer a $630.6 billion decrease in
property values that will cut property tax revenue to local governments by
almost $3 billion, the study found. The New York City region will see the
greatest slowdown in the output of goods and services because of the mortgage
crisis, according to the report… ‘The real estate crisis of 2007 and 2008 will
go down in the record books,’ according to the report… The wave of foreclosures
that has rippled
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