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5 CREDIT BUBBLE
BULLETIN Reflation
contemplation By Doug
Noland
hamstring efforts to buoy the
economy when such measures are desperately needed.
Many economies have been forced into
"tough macroeconomic policies" during the fateful
15-year global experiment in unfettered
contemporary finance. In many cases, it was a
quite tumultuous and wrenching experience. But
these episodes also provided examples of the
capacity to bounce back after relatively short but
deep financial and economic adjustment periods.
Perhaps global markets will not impose a severe
adjustment upon our system as it did to others
that had similarly allowed borrowing and spending
imbalances to severely
distort the underlying economic structure. Yet
that would only ensure years of stagnation,
inflation and unrest. The goal of avoiding
recession at all cost carries with it enormous
costs.
WEEKLY WRAP For the week,
the S&P Homebuilding index gained 16.8% (up
28.7% y-t-d), the Morgan Stanley Retail index rose
11.4% (up 5.0%), the Broker/Dealers gained 11.6%
(up 2.2%), the Banks jumped 11.2% (up 8.5%), the
Transports increased 7.4% (down 5.2%), and the
Morgan Stanley Cyclicals advanced 7.2% (down
1.8%). The Dow rose 4.4% (down 3.9%) and the
S&P500 4.9% (down 5.0%). The Morgan Stanley
Consumer index gained 3.8% (down 5.5%) and the
Utilities 5.2% (down 5.4%). The Russell 2000
jumped 6.1% (down 4.6%) and the S&P400
Mid-Caps 6.7% (down 4.1%). The NASDAQ100 gained
3.7% (down 11%) and the Morgan Stanley High Tech
index 4.7% (down 10%). The Semiconductors surged
7.1% (down 6.9%). The Street.com Internet Index
rose 4.6% (down 7.3%) and the NASDAQ
Telecommunications index gained 4.4% (down 8%).
The Biotechs added 2.9% (down 3.3%). With Bullion
slipping $8.65, the HUI Gold index declined 2.2%
(up 10.3%).
Melt-up seven straight weeks.
Three-month Treasury bill rates sank another 22
bps this past week to 2.08%. Two-year government
yields fell 12 bps to 2.07%. Five-year T-note
yields dipped 2 bps to 2.74%, while ten-year
yields added 2 bps to 3.59%. Long-bond yields were
3 bps higher at 4.30%. The 2yr/10yr spread ended
the week at 152 bps. The implied yield on 3-month
December ’08 Eurodollars dropped 10 bps to 2.51%.
Benchmark Fannie MBS yields added 2 bps to 5.07%,
this week performing in line with Treasuries. The
spread on Fannie’s 5% 2017 note widened 4 to 55
bps and Freddie’s 5% 2017 note widened 4 to 55
bps. The 10-year dollar swap spread increased 3.6
to 63.3. Corporate bond spreads were mixed to
narrower, with an index of junk bonds 5 narrower
this week.
Investment grade issuance
included Bear Stearns $3.0bn, AT&T $2.5bn,
Merrill Lynch $2.25bn, Union Pacific $750 million,
John Deere $425 million, Air Products $300
million, GATX $200 million, and Oklahoma G&E
$200 million.
January 29 - Bloomberg
(Caroline Salas and Shannon D. Harrington): "The
market for high-yield, high-risk bonds shows that
a U.S. recession is a foregone conclusion. Junk
bonds are off to their worst start since 1990,
falling 1.8% and triggering $17 billion in losses
this month ... Yields relative to Treasuries are
rising at the fastest pace in at least 11 years as
prices drop. The pain may only get worse.
Speculative-grade borrowers made up the majority
of US corporate debtors for the first time last
year, according to Standard & Poor's. The
default rate will soar to more than 8% this year,
the highest since Enron Corp's collapse ..."
Junk issuance included Petroleum
Development Co. $200 million.
Foreign
dollar debt issuance included Philippines $1.5bn.
German 10-year bund yields declined 5 bps
to 3.92%, while the DAX equities index recovered
2.2% (down 13.6% y-t-d). Japanese "JGB" yields
fell 5 bps to 1.42%. The Nikkei 225 declined
another 1.0% (down 11.8% y-t-d and 23% y-o-y).
Emerging equities markets were mostly higher,
while debt markets were generally quiet. Brazil's
benchmark dollar bond yields dipped 2 bps to
5.69%. Brazil’s Bovespa equities index surged 6.3%
(down 4.4% y-t-d). The Mexican Bolsa rallied 7.5%
(down 0.4% y-t-d). Mexico’s 10-year $ yields added
2 bps to 5.15%. Russia's RTS equities index
declined 3.1% (down 14% y-t-d). India's Sensex
equities index slipped 0.6% (down 10.1% y-t-d).
China's Shanghai Exchange sank 9.3%, boosting
y-t-d losses to 17.9% (up 55% y-o-y).
Freddie Mac posted 30-year fixed mortgage
rates jumped 20 bps this week to 5.68% (down 66bps
y-o-y), reversing almost all of last week's
decline. Fifteen-year fixed rates surged 22 bps to
5.17% (down 89bps y-o-y). One-year adjustable
rates rose 6 bps to 5.05% (down 49bps y-o-y).
Bank Credit surged $71bn during the most
recent data week (1/23) to a record $9.372 TN.
Bank Credit posted a 27-week surge of $729bn
(16.2% annualized) and a 52-week rise of $1.063
TN, or 12.8%. For the week, Securities Credit
jumped $46.6bn. Loans & Leases gained $24.3bn
to a record $6.866 TN (27-wk gain of $541bn).
C&I loans declined $3.8bn, with one-year
growth of 21.3%. Real Estate loans rose $10bn (up
7.3% y-o-y). Consumer loans added $1.5bn.
Securities loans increased $1.6bn, and Other loans
jumped $14.9bn. On the liability side, Deposits
jumped $89.5bn.
M2 (narrow) "money" supply
jumped $50bn to $7.492 TN (week of 1/21). Narrow
"money" expanded $403bn y-o-y, or 5.7%. For the
week, Currency added $1.7bn and Demand &
Checkable Deposits increased $24.7bn. Savings
Deposits rose $7.0bn, while Small Denominated
Deposits gained $3.9bn. Retail Money Fund assets
increased $13bn.
Total Money Market Fund
assets (from Invest. Co Inst) surged another
$62.9bn last week (4-wk gain $202bn) to a record
$3.314 TN. Money Fund assets have posted a 27-week
rise of $731bn (55% annualized) and a one-year
increase of $958bn (41%).
Asset-Backed
Securities (ABS) issuance increased this week to
$4.6bn. Year-to-date total US ABS issuance of
$24bn (tallied by JPMorgan) remains less than half
of comparable 2007. No Home Equity ABS deals have
been sold thus far, compared to almost $33.3bn in
comparable 2007. There has been less than $1bn of
CDO issuance year-to-date, compared to $12.2bn
this time last year.
Total Commercial
Paper increased $10bn to an 11-week high $1.857
TN. CP has declined $367bn over the past 25 weeks.
Asset-backed CP slipped $1.1bn (25-wk drop of
$383bn) to $812bn. Over the past year, total CP
has contracted $138bn, or 6.9%, with ABCP down
$242bn (23%).
Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 1/28)
increased $14.6bn to a record $2.110 TN. "Custody
holdings" were up $320bn year-over-year (17.9%).
Federal Reserve Credit gained $3.1bn last week to
$861.5bn. Fed Credit expanded $20.4bn y-o-y
(2.4%).
International reserve assets
(excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.315 TN y-o-y, or 26.4%, to
a record $6.289 TN.
Global Credit
Market Dislocation Watch January 31 -
Bloomberg (Jody Shenn and David Mildenberg):
"Losses from securities linked to subprime
mortgages may exceed $265 billion as regional U.S.
banks, credit unions and overseas financial
institutions write down the value of their
holdings, according to Standard & Poor's."
January 30 - Bloomberg (Jody Shenn):
"Standard & Poor's said it cut or may reduce
ratings of $534 billion of subprime-mortgage
securities and collateralized debt obligations as
default rates rise. The downgrades may extend
losses at the world’s banks to more than $265
billion, S&P said. The securities represent
$270.1 billion, or 47%, of mortgage bonds rated
between January 2006 and June 2007 ... The ...
company also said it may cut 572 CDOs valued at
$263.9 billion."
January 31 - Bloomberg
(Christine Richard): "MBIA Inc ... posted its
biggest-ever quarterly loss and may raise more
capital after a slump in the value of
subprime-mortgage securities. The fourth-quarter
net loss was $2.3 billion, or $18.61 a share,
raising concern that the…company will lose its top
credit rating."
February 1 - Bloomberg
(Mark Pittman): "Moody's ... may downgrade some
bond insurers in the next few weeks as it
reassesses the extent of losses from subprime
mortgage securities. The industry review will be
completed by late February and ratings may be cut
on some companies earlier if they can't raise
capital ... 'Our estimate of capital needed to
support the mortgage-related risk of some
guarantors has risen significantly,' Moody's
analysts led by Stanislas Rouyer said ..."
January 29 - Bloomberg (Jody Shenn): "The
market for US collateralized debt obligations
remained shut for a fourth week, according to
JPMorgan Chase & Co., on concern that ratings
companies haven't adequately assessed the
securities. Demand for debt created by slicing
pools of assets into securities stalled as some
top-rated classes of mortgage-linked CDOs lost all
their value amid surging US foreclosures and as
bondholders faced unprecedented downgrades on
home-loan bonds."
January 31 - Financial
Times (Michael Mackenzie): "The US high-yield debt
market remains effectively closed for business,
with the amount of money borrowed by companies in
January the lowest for that month since 1990 ...
The moribund high-yield activity comes at a time
when Wall Street has still not placed some $250bn
in bank loans and high-yield bonds. An inability
to borrow fresh money can lead to liquidity
problems for highly indebted companies, and
ultimately to higher levels of corporate
defaults."
February 1 - Bloomberg (Jeremy
R. Cooke): "US state and local governments sold
about $17 billion of tax-exempt bonds in January,
the least since September 2001, as bond insurers'
weakening credit and rising debt costs damped
municipal borrowing."
January 30 -
Bloomberg (Yalman Onaran and Bradley Keoun):
"Merrill Lynch & Co, the world’s largest
brokerage, plans to exit the business of
underwriting collateralized debt obligations and
other structured credit products after the
securities led to a record loss. 'We are not going
to be in the CDO and structured-credit
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