Page 2 of 5 More than 20 years in the
making: By Doug Noland
to calm down
anytime soon. There is no quick or easy fix to any
of the myriad current problems - seized-up
securitization markets, sinking housing prices,
faltering bond insurers, counterparty issues, a
crisis in confidence for Wall Street finance, or
acute economic vulnerability - to name only the
most obvious. Again, they’ve been more than 20
years in the making.
WEEKLY
WRAP For an especially idiosyncratic
trading week, the Dow rallied 0.9% (down 8.0%
y-t-d) and the S&P500 added 0.4% (down 9.4%).
The Transports surged 6.6% (down 2.1%), while the
Utilities were smacked for 4.7% (down 10.1%). The
Morgan Stanley Cyclical
index jumped 4.3% (down
8.3%), while the Morgan Stanley Consumer index
declined 1.3% (down 8.9%). The S&P400 Mid-Caps
gained 2.0% (down 10.1%) and the small cap Russell
2000 rallied 2.2% (down 10.1%). The NASDAQ100 fell
3.1% (down 14.2%), and the Morgan Stanley High
Tech index declined 2.3% (down 14.2%). The
Semiconductors dipped 1.1% (down 13.1%). The
Street.com Internet Index added 0.2% (down 11.4%)
and the NASDAQ Telecommunications index recovered
1.1% (down 11.9%). The volatile Biotechs sank 6.5%
(down 6.0%). Financial stocks went into panic
melt-up mode. The Broker/Dealers surged 6.3% (down
8.5%) and the Banks 10.3% (down 2.4%). With
Bullion surging $30.80, the HUI Gold index gained
5.9% (up 12.8%).
More melt-up ...
Three-month Treasury bill rates collapsed 58 bps
the past week to 2.26%. Two-year government yields
sank 15 bps to 2.20%. Five-year T-note yields
declined 7 bps to 2.77%, and ten-year yields fell
7 bps to 3.56%. Long-bond yields were one basis
point lower at 4.27%. The 2yr/10yr spread ended
the week at 130 bps. The implied yield on 3-month
December ’08 Eurodollars declined 4 bps to 2.62%.
Benchmark Fannie MBS yields were little changed at
5.05%, this week under-performing Treasuries. The
spread on Fannie’s 5% 2017 note was one narrower
at 49 bps and Freddie’s 5% 2017 note one narrower
at 49 bps. The 10-year dollar swap spread declined
2.8 to 59.8. Corporate bond spreads were mixed,
although the spread on an index of junk bonds
ended the week 6 bps wider.
January 21 –
Financial Times (Deborah Brewster): "Investors are
pouring money into the opposite ends of the risk
spectrum, with cash and high-risk emerging markets
attracting record inflows while the middle ground
- traditional bond and equity funds - attract
little or no money. In an unprecedented shift of
money from developed world stock markets to
emerging markets, US investors last year put a
record $40bn into emerging markets funds - almost
double the amount of last year… Other than
emerging markets, money market funds were the
clear winners in 2007, with inflows of $760bn
during the year that lifted their assets to a
record $3,100bn, according to iMoney-Net."
It was another slow week of debt sales.
Investment grade issuance included Bank America
$12bn, Wal-Mart $4.25bn, IBM $3.5bn, National City
$1.65bn, and Harvard $400 million.
Junk
issuance included Panoche Energy $320 million.
Convertible issuers included Kinross Gold
$460 million and Solarfun Power $150 million.
Foreign dollar debt issuance included
Export Development Canada $1.25bn and Andina de
Fomento $750 million.
January 24 –
Bloomberg (Lester Pimentel): "Emerging-market
bonds rose, with yields over U.S. Treasuries
narrowing the most since June 2005, on speculation
the Federal Reserve will cut interest rates again
next week to support the U.S. economy. The spread,
or extra yield investors demand to hold
emerging-market securities rather than Treasuries,
narrowed 32 bps, the most since June 13, 2005, to
2.63 percentage points…"
German 10-year
bund yields were little changed at 3.975%, while
the DAX equities index sank 6.4% (down 15.1%
y-t-d). Japanese "JGB" yields jumped a notable 8.5
bps to 1.475%. The Nikkei 225 declined 1.7% (down
11.0% y-t-d). Emerging equities markets were down,
while debt markets mostly held their own. Brazil’s
benchmark dollar bond yields gained 5 bps to
5.73%. Brazil’s Bovespa equities index rallied
0.8% (down 10.1% y-t-d). The Mexican Bolsa gained
2.5% (down 7.3% y-t-d). Mexico’s 10-year $ yields
rose 7 bps to 5.17%. Russia’s RTS equities index
sank 5.8% (down 11.2% y-t-d). India’s Sensex
equities index fell 3.4% (down 9.5% y-t-d).
China’s Shanghai Exchange was slammed for 8.1%,
increasing y-t-d losses to 9.5% (up 66.6% y-o-y).
Freddie Mac posted 30-year fixed mortgage
rates fell another 21bps this week to 5.48% (down
77 bps y-o-y). Fifteen-year fixed rates sank 26
bps to 4.95% (down 103bps y-o-y), with a notable
four-week decline of 84 bps. One-year adjustable
rates sank 27 bps to 4.99% (down 50bps y-o-y).
Bank Credit declined $8.9bn during the
most recent data week (1/16) to $9.293 TN. Bank
Credit posted a 26-week surge of $650bn (15.0%
annualized) and a 52-week rise of $985bn, or
11.9%. For the week, Securities Credit declined
$12.7bn. Loans & Leases added $3.9bn to a
record $6.833 TN (26-wk gain of $509bn). C&I
loans gained $7.4bn, with one-year growth of
21.3%. Real Estate loans fell $13.1bn (up 7.5%
y-o-y). Consumer loans added $0.6bn. Securities
loans increased $1.5bn, and Other loans gained
$7.3bn. On the liability side, (previous M3) Large
Time Deposits jumped $27.3bn.
M2 (narrow)
"money" supply fell $16.9bn to $7.441 TN (week of
1/14). Narrow "money" expanded $360bn y-o-y, or
5.1%. For the week, Currency declined $1.6bn and
Demand & Checkable Deposits fell $14.4bn.
Savings Deposits decreased $5.4bn, while Small
Denominated Deposits added $0.8bn. Retail Money
Fund assets increased $3.8bn.
Total Money
Market Fund assets (from Invest. Co Inst) surged a
notable $62.9bn last week (3-wk gain $139bn) to a
record $3.252 TN. Money Fund assets have posted a
26-week rise of $668bn (52% annualized) and a
one-year increase of $860bn (36%).
Asset-Backed Securities (ABS) issuance
this week slowed to about $4bn. Year-to-date total
US ABS issuance of $19bn (tallied by JPMorgan) is
less than half of comparable 2007. No Home Equity
ABS deals have been sold thus far, compared to
almost $24bn in the first few weeks of 2007. There
has been no CDO issuance year-to-date, compared to
$4.4bn this time last year.
Total
Commercial Paper dipped $1.6bn to $1.847 TN. CP
has declined $377bn over the past 24 weeks.
Asset-backed CP gained $8.2bn (24-wk drop of
$382bn) last week to $813bn. Over the past year,
total CP has contracted $147bn, or 7.4%, with ABCP
down $252bn (23.7%).
Fed Foreign Holdings
of Treasury, Agency Debt last week (ended 1/21)
jumped $24.1bn to a record $2.096 TN. "Custody
holdings" were up $316bn year-over-year (17.8%).
Federal Reserve Credit declined $6.0bn last week
to $861.5bn. Fed Credit expanded $24.4bn y-o-y
(2.9%).
International reserve assets
(excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi – were up $1.337 TN y-o-y, or 27%, to a
record $6.273 TN.
Global Credit Market
Dislocation Watch January 25 – Reuters
(Neil Shah): "A government-brokered rescue plan
for U.S. bond insurers of about $15 billion came
under fire on Friday, with analysts saying the
ailing insurers may need as much as $200 billion
to remain viable. A cash infusion would allow the
bond insurers to maintain their top credit rating,
which is critical to their business of
guaranteeing some $2.5 trillion of municipal bonds
and asset-backed securities. Analysts warned some
investors would face huge write-downs on the
valuation of securities guaranteed by the insurers
if they lost their top credit rating…"
January 21 – Financial Times (Robert
Cookson and Sarah O’Connor): "Until a few months
ago, ‘counterparty risk’ was something that only
worried professional risk managers at major banks.
With the world awash with cheap debt, booming
asset prices and the lowest default rate in a
generation, the possibility that one’s trading
partners would not honour their financial
commitments seemed remote. But recent weeks have
seen an unfamiliar item taking chunks out of
banks’ balance sheets - counterparty risk is back.
Over the weekend, ACA, a small bond insurer, has
been in frantic talks to avoid insolvency… Some
are waking up to the idea that this might only be
the tip of the iceberg. Specialist bond insurers
are not the only companies that have been insuring
debt. Banks, hedge funds and other financial
institutions have been both buying and selling
debt default insurance for years. The
lightly-regulated market for these contracts now
stands at an estimated $45,000bn… ‘Can we lay out
the intricate web of counterparty risk for swaps
and derivatives - who owes what to whom?’ asked
Richard Bookstaber, an expert on systemic risk and
former risk manager at Morgan Stanley and Salomon
Brothers. ‘At this point we cannot. And so we
cannot map out how a failure in one segment of the
financial market might propagate out to affect
other segments.’"
January 24 – Financial
Times (Peter Thal Larsen): "The last thing the
world’s banks needed right now was a rogue trading
scandal. In the past six months, they have been
buffeted by large trading losses triggered by the
subprime mortgage crisis in the US and market
turmoil has raised fundamental questions about
their business model. They are facing severe
capital constraints and the prospect of an abrupt
economic slowdown. Even before Société Générale’s
shock announcement, most bankers were already
deeply apprehensive about the future. Against that
backdrop, the idea that a lone trader could
apparently blow a €4.9bn ($7.2bn) hole in the
world’s leading equity derivatives houses could
only add to the gloom. The revelation, accompanied
by a €5.5bn emergency rights issue, is likely to
undermine further investors’ fragile faith in
large banks’ ability to manage complex trading
risks."
January 24 – Financial Times (Ben
White and Aline Van Duyn): "The largest US banks
are under pressure from New York state insurance
regulators to provide as much as $15bn in fresh
capital to support struggling bond insurers… Eric
Dinallo, New York insurance superintendent, has
met executives at the banks and has strongly urged
them to provide $5bn in immediate capital to
support the bond insurers, the largest of which
are MBIA and Ambac, and ultimately to commit up to
$15bn… Concerns for MBIA and Ambac grew last week
when Fitch Ratings downgraded Ambac from triple-A
status to double-A. The business model of both
companies depends on them keeping their top level
credit rating. Share prices for both Ambac and
MBIA rose yesterday amid rising hopes for a
capital injection. People familiar with the matter
said details had yet to be worked out but that
contributions to the bail-out fund would not
necessarily be based on how much exposure each
bank had to the insurers, known as monolines."
January 24 – Bloomberg (John Glover): "The
$230 billion backlog of high-risk, high-yield debt
that banks planned to sell has stopped shrinking,
and probably will hinder lending to new borrowers,
Bank of America Corp. said… Lenders have about
$160 billion of leveraged loans on their books and
about $70 billion of junk bonds still must be
sold, analyst Clemens Mueller…wrote… ‘With highly
volatile secondary markets and high-yield spreads
having widened to levels not seen since 2003,’
sales of bonds and loans are ‘very challenging,’
Mueller wrote. Debt financing leveraged buyouts
‘represents the lion’s share of calendar
volume.’"'
January 25 – Bloomberg (Jody
Shenn): "The extra yield over benchmark Treasuries
that investors demand to own top-rated commercial
mortgage-backed securities rose this week by the
most ever, according to a Morgan Stanley index.
The average spread over similar-maturity
Treasuries for AAA rated 10-year securities jumped
32% to 244 basis points… The extra yield over
10-year swap rates, a more commonly used
benchmark, rose 48% to a record 185 bps, the
biggest increase since October 1998 amid the
collapse of Long Term Capital Management LP and
Russia’s debt default."
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