3-month December ’08 Eurodollars
sank 24 bps to 2.66%. Benchmark Fannie MBS yields
fell 10 bps to 5.06%, this week under-performing
Treasuries. The spread on Fannie’s 5% 2017 note
was one wider at 50 bps and Freddie’s 5% 2017 note
little changed at 50 bps. The 10-year dollar swap
spread increased 1.8 to 62. Most corporate bond
spreads were wider, with the spread on an index of
junk bonds ending the week another 16 bps wider.
Investment grade issuance included Target
$4.0bn, Cargilll $1.25bn, National Rural Utility
Coop $700 million, Southern
content California
Edison $600 million, State Street $500 million,
ITC Holdings $385 million, John Deere $350
million, ITC Midwest $175 million, and Textron
$100 million.
Junk issuance included Atlas
Energy $250 million and Theravance $150 million.
Convertible issuers included Pioneer Natural
Resources $440 million. Foreign
dollar debt issuance included Oester Kontronbk
$2.0bn.
German 10-year bund yields dropped
10 bps this week to 3.97%, while the DAX equities
index sank 5.2% (down 9.3% y-t-d). Japanese "JGB"
yields declined 2 bps to 1.39%. The Nikkei 225
fell 3.7% (down 9.5% y-t-d). Emerging equities
markets took it on the chin, while debt markets
were mixed-to-lower. Brazil’s benchmark dollar
bond yields jumped 10 bps to 5.69%. Brazil’s
Bovespa equities index sank 7.2% (down 10% y-t-d).
The Mexican Bolsa fell 7.0% (down 9.6% y-t-d).
Mexico’s 10-year $ yields dropped 10 bps to 5.11%.
Russia’s RTS index was hammered for 6.7% (down
5.7% y-t-d). India’s Sensex equities index sank
8.7% (down 6.3% y-t-d). China’s Shanghai Exchange
dropped 5.5%, reducing y-t-d performance to a loss
of 1.5% (up 88% y-o-y).
Freddie Mac posted
30-year fixed mortgage rates dropped 18 bps this
week to 5.69% (down 54bps y-o-y). Fifteen-year
fixed rates sank 22 bps to 5.21% (down 77 bps
y-o-y), with a two-week decline of 47 bps.
One-year adjustable rates fell 11 bps to 5.26%
(down 25 bps y-o-y).
Bank Credit jumped
$24.8bn during the most recent data week (1/9) to
a record $9.304 TN (4-wk gain of $140bn). Bank
Credit posted a 25-week surge of $660bn (15.9%
annualized) and a 52-week rise of $1.005 TN, or
12.1%. For the week, Securities Credit dipped
$1.7bn. Loans & Leases surged $26.5bn to a
record $6.831 TN (25-wk gain of $507bn). C&I
loans declined $2.2bn, with one-year growth of
21.4%. Real Estate loans gained $9.4bn (up 7.7%
y-o-y). Consumer loans rose $6.6bn. Securities
loans gained $11.1bn, and Other loans added
$1.7bn. On the liability side, (previous M3) Large
Time Deposits increased $2.9bn. M2 (narrow)
"money" supply slipped $5.9bn to $7.456 TN (week
of 1/7). Narrow "money" expanded $399bn y-o-y, or
5.6%. For the week, both Currency and Demand &
Checkable Deposits were little changed. Savings
Deposits fell $10.1bn, while Small Denominated
Deposits added $1.4bn. Retail Money Fund assets
increased $2.9bn.
Total Money Market Fund
assets (from Invest. Co Inst) surged $23.8bn last
week (2-wk gain $75.8bn) to a record $3.189 TN.
Money Fund assets have posted a 25-week rise of
$605bn (49% annualized) and a one-year increase of
$810bn (34.1%).
Total Commercial Paper
rose $35.5bn to $1.849 TN. CP has declined $375bn
over the past 23 weeks. Asset-backed CP jumped
$26.4bn (23-wk drop of $390bn) last week to
$805bn. Over the past year, total CP has
contracted $147bn, or 7.4%, with ABCP down $265bn
(24.8%).
Fed Foreign Holdings of Treasury,
Agency Debt last week (ended 1/14) jumped $14.4bn
to a record $2.072 TN. "Custody holdings" were up
$299bn year-over-year (16.9%). Federal Reserve
Credit declined $1.7bn last week to $867.5bn. Fed
Credit expanded $21.5bn y-o-y (2.5%).
International reserve assets (excluding
gold) - as accumulated by Bloomberg’s Alex Tanzi –
were up $1.334 TN y-o-y, or 27.1%, to a record
$6.270 TN.
Global Credit Market
Dislocation Watch January 18 – Bloomberg
(Christine Richard): "Ambac Financial Group Inc.,
the second-largest bond insurer, was stripped of
its AAA credit rating by Fitch Ratings after the
company abandoned plans to raise new equity… The
downgrade ‘reflects the significant uncertainty
with respect to the company’s franchise, business
model and strategic direction,’ Fitch said.
Without its AAA rating…Ambac may be unable to
write the top-ranked bond insurance that makes up
74% of its revenue…. The downgrade throws doubt on
the ratings of $556 billion in municipal and
structured finance debt guaranteedby Ambac. ‘This
makes Ambac insurance toxic,’ said Matt Fabian,
senior analyst and managing director at Municipal
Market Advisors… ‘The market has no tolerance for
a ratings-deprived insurer.’"
January 18 –
Bloomberg (Shannon D. Harrington and Christine
Richard): "MBIA Inc. and Ambac Financial Group
Inc., the two biggest bond insurers, have a more
than 70% chance of going bankrupt, credit-default
swaps show. Prices for contracts that pay
investors if…MBIA can’t meet its debt obligations
imply a 71% chance the company will default in the
next five years, according to a JPMorgan Chase
& Co. valuation model. Contracts on…Ambac
imply 72% odds."
January 17 – Bloomberg
(Emma Moody): "MBIA Inc.’s AAA insurance rating
may be cut by Moody’s… Moody’s also said it may
cut the Aa2 rating of surplus notes sold by MBIA
last week. The ratings review reflects potential
losses from subprime mortgage securities including
collateralized debt obligations, Moody’s said…"
January 18 – Bloomberg (Mark Pittman):
"ACA Capital Holdings Inc. has until midnight in
New York to convince trading partners to give the
insurer more time to get out of $60 billion in
credit-default swap contracts it can’t pay, the
company’s regulator said."
January 17 –
Bloomberg (Mark Pittman): "Merrill Lynch &
Co., the biggest underwriter of collateralized
debt obligations, said it will write off $2.6
billion in default protection from bond insurers
including ACA Capital Holdings Inc. because it’s
worthless… Merrill Lynch’s writedowns demonstrate
how a downgrade of bond insurer credit ratings can
spread throughout financial markets. Losing the
AAA stamp would cripple the bond insurers and
throw doubt on the ratings of $2.4 trillion of
securities."
January 18 – Bloomberg
(Shannon D. Harrington): "The risk of U.S.
companies defaulting on their debt rose for the
fourth day on concern that the world’s two biggest
bond insurers will lose their top AAA ratings,
trading in credit-default swaps shows. The Markit
CDX North America Investment-Grade Index, a
benchmark gauge of default risk tied to the bonds
of 125 companies, rose 3.25 bps to a near-record
110.5 bps, according to Deutsche Bank… The index
has soared 13.25 bps in the past four days…"
January 18 – Bloomberg (Jody Shenn): "The
cost of protection against defaults on
commercial-mortgage-backed securities ended this
week at records after Fitch Ratings tightened
standards and some borrowers were unable to make
their payments. A Markit CMBX index of
credit-default swaps tied to 25 bonds rated AAA
when created in mid-2007 surged to 122.19 basis
points, or 45% higher than Jan. 11… The
CMBX-NA-BBB- 4 index, tied to bonds with the
lowest investment-grade ratings and backed by the
same loan pools, jumped 26% to 1,564 basis
points."
January 16 – Financial Times (Ben
White and Justin Baer): "Citigroup’s announcement
yesterday that it lost nearly $10bn in the fourth
quarter and would write down $18.1bn on subprime
mortgage-related losses was not cheering to
investors. Nor was the bank’s decision to slash
its dividend by 40% and raise $14.5bn in fresh
capital…But these things at least did not come as
much of a surprise… What came as more of a shock,
and left analysts scurrying to reassess Citi’s
earnings power in the future, was the jump in
credit costs to $5.4bn, which included a charge of
$3.31bn to increase US consumer loan-loss
reserves, up from a net release of $127m a year
ago. The increase reflects rising delinquencies on
first and second mortgages, unsecured personal
loans, credit cards and auto loans. And the
increase in reserves indicates Citi believes the
health of the consumer is likely to get
significantly worse before it gets better as the
US heads into a downturn."
January 16 –
Bloomberg (Shannon D. Harrington): "The worst may
still be ahead for the world’s biggest financial
companies, trading in credit-default swaps shows.
Prices for contracts tied to the bonds of MBIA
Inc., Bear Stearns Cos. and Washington Mutual
Inc., which protect lenders and creditors against
the possibility that debt payments won’t be made,
are higher for one year than for five, according
to data compiled by Bloomberg. Longer-term
protection is usually more expensive because the
risk of nonpayment is greater… Lenders hold more
than $200 billion of bonds and loans used to
finance leveraged buyouts that they can’t sell and
are falling in value, based on data compiled by
JPMorgan Chase & Co."
January 17 –
Financial Times (Ben White): "Citigroup and
Merrill Lynch turned to foreign investors for an
unprecedented bail-out yesterday, saying they will
raise a total of $21.1bn in fresh capital - mainly
from outside the US - to shore up balance sheets
devastated by the subprime mortgage crisis.
Citigroup also unnerved investors by warning of
losses to come from consumer loans as it revealed
a 40% dividend cut, a $9.83bn fourth-quarter loss,
$18bn in subprime-related credit writedowns and
remaining exposure of $37bn to subprime mortgages.
‘No one can say this whole thing is over.’ Gary
Crittenden, Citi chief financial officer, said…
‘These are not optimistic assumptions. But there
are always circumstances under which things could
get worse.’ Citigroup is raising $14.5bn and
Merrill $6.6bn, largely from private investors and
governments in the Middle East and Asia,
representing the biggest-ever single transfer of
capital to American banks from abroad. It could
raise pressure from US politicians concerned about
foreign influence on the banking system. ‘Not
since before World War I have companies gone
looking for foreign
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