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5 CREDIT BUBBLE
BULLETIN Nationalization and
dislocation Commentary and
weekly watch by Doug Noland
Even with the
collapse of Bear Stearns, the Broker/Dealer index
gained 3.3% (down 21.7%). With Bullion sinking
$92.50, the HUI Gold index was smacked for 17.3%
(up 7.2%).
Not enough Treasuries to go
around or to fulfill commitments... One-month
Treasury bill rates sank 88 bps this past week to
0.315%, with 3-month yields down 59 bps to 0.61%.
Two-year government yields jumped 11 bps to 1.59%.
Five-year T-note yields slipped 3 bps to 2.37%,
and ten-year yields fell 11 bps to 3.33%.
Long-bond yields sank 19 bps to 4.17%. The
2yr/10yr spread ended the week at 174 bps. The
implied yield on 3-month December ’08 Eurodollars
surged 21 bps to 2.215%. Benchmark
Fannie MBS yields sank 34 bps
to 5.11%. The spread between benchmark MBS and
Treasuries narrowed 21 to 177 bps. The spread on
Fannie’s 5% 2017 note narrowed 25 to 69 bps and
the spread on Freddie’s 5% 2017 note narrowed 24
to 70 bps. The 10-year dollar swap spread dropped
9.5 to 62. Corporate bond spreads were mostly
narrower. An index of investment grade bond
spreads narrowed 30 to 190 bps. Meanwhile, an
index of junk bond spreads widened 14 to 642 bps
(note to federal govt: Wall Street could use a
taxpayer-backed "Junkie Mae").
Investment
grade issuance included Weatherford International
$1.5bn, International Lease Finance $900 million,
Bank of New York $750 million, Commonwealth Edison
$700 million, Appalachian Power $500 million,
Kroger $400 million, and Mid-American Energy $350
million.
I saw no junk or convert issuance
this week (although much of so-called
"investment"-grade issuance was borderline).
International dollar bond issuance
included British Telecom $1.95bn.
German
10-year bund yields rose 2 bps to 3.75%, as the
DAX equities index fell 2.0% (down 21.7% y-t-d).
Japanese "JGB" yields added one basis point to
1.27%. The Nikkei 225 declined 2.0% (down 18.5%
y-t-d and 27.3% y-o-y). Emerging stocks were
mostly lower and bonds mostly higher. Brazil’s
benchmark dollar bond yields declined 7 bps to
6.27%. Brazil’s Bovespa equities index dropped
4.8% (down 7.7% y-t-d). The Mexican Bolsa fell
1.7% (down 1.6% y-t-d). Mexico’s 10-year $ yields
sank 21 bps to 4.90%. Russia’s RTS equities index
was hit for 4.8% (down 14.2% y-t-d). India’s
Sensex equities index dropped 4.9%, boosting y-t-d
losses to 26.1%. China’s Shanghai Exchange fell
4.2% this week, with 2008 losses now at 27.8%.
Freddie Mac 30-year fixed mortgage rates
sank 26 bps this week to 5.87%, with rates down 29
bps from a year earlier. Fifteen-year fixed rates
dropped 33 bps to 5.27% (down 63 bps y-o-y).
One-year adjustable rates added one basis point to
5.15% (down 25 bps y-o-y).
Bank Credit
surged another $38.8bn (4-wk gain of $142bn)
during the most recent reporting period (3/12) to
a record $9.453 TN. Bank Credit has increased
$240bn y-t-d, or 12.3% annualized. Bank Credit
posted a 34-week surge of $810bn (14.3%
annualized) and a 52-week rise of $1.130 TN, or
13.4%. For the week, Securities Credit jumped
$63.9bn. Loans & Leases declined $25.1bn to
$6.891 TN (34-wk gain of $567bn). C&I loans
added $2.0bn, with one-year growth of 21.4%. Real
Estate loans declined $2.6bn. Consumer loans
gained $3.8bn, while Securities loans declined
$8.3bn. Other loans fell $20bn. Examining the
liability side, Deposits jumped $47.2bn.
M2 (narrow) "money" supply gained $5.3bn
to a record $7.650 TN (week of 3/10). Narrow
"money" expanded $187bn over the past 10 weeks, or
13.1% annualized, with a y-o-y rise of $492bn, or
6.9%. For the week, Currency increased $2.0bn,
while Demand & Checkable Deposits dropped
$33.3bn. Savings Deposits jumped $38.2bn, while
Small Denominated Deposits declined $1.9bn. Retail
Money Fund assets added $0.3bn.
Total
Money Market Fund assets (from Invest Co Inst)
rose $14bn last week (11-wk gain $355bn) to a
record $3.468 TN. Money Fund assets have posted a
34-week rise of $884bn (52% annualized) and a
one-year increase of $1.037 TN (42.7%).
Asset-Backed Securities (ABS) issuance was
a slow $3bn or so. Year-to-date total US ABS
issuance of $42.6bn (tallied by JPMorgan's
Christopher Flanagan) is running only 25% of the
level from comparable 2007. Home Equity ABS
issuance of $197 million is a fraction of
comparable 2007's $91.7bn. Year-to-date CDO
issuance of $6bn compares to the year ago $101bn.
Total Commercial Paper dropped $14.3bn to
$1.831 TN. CP has declined $393bn over the past 32
weeks. Asset-backed CP declined $4.3bn (32-wk drop
of $415bn) to $780bn. Over the past year, total CP
has contracted $166bn, or 8.3%, with ABCP down
$275bn, or 26%.
Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 3/19)
surged $17.3bn to a record $2.168 TN. "Custody
holdings" were up $112bn y-t-d, or 23.6%
annualized, and $293bn year-over-year (15.6%).
Federal Reserve Credit jumped $9.6bn to $879bn.
Fed Credit has expanded $5.3bn y-t-d, while having
increased $27.7bn y-o-y (3.2%).
International reserve assets (excluding
gold) - as accumulated by Bloomberg’s Alex Tanzi -
were up $1.391 TN y-o-y, or 27.5%, to a record
$6.444 TN.
Global Credit Market
Dislocation Watch March 17 - Financial
Times (Gillian Tett): "In recent years, bankers
have succumbed to the idea that the credit world
was all about numbers and complex computer models.
These days, however, this assumption looks ever
more of a falsehood. For as anyone with a
classical education knows, credit takes its root
from the Latin word credere ("to trust") And as
the current credit turmoil now mutates into
ever-more virulent forms, it is faith - or,
rather, the lack of it - that has turned a
subprime squall into a what is arguably the worst
financial crisis in seven decades. Make no
mistake: what we are witnessing right now is not
just a collapse of faith in one single institution
(namely Bear Stearns) or even an asset class
(those dodgy subprime mortgage bonds). Instead, it
stems from a loss of trust in the whole style of
modern finance, with all its complex slicing and
dicing of risk into ever-more opaque forms. And
this trend is not just damaging the credibility of
banks, but the aura of omnipotence that has
enveloped institutions such as the US Federal
Reserve in recent years."
March 20 -
Bloomberg (Scott Lanman): "The Federal Reserve
expanded collateral eligible for its auction of
Treasuries to include bundled mortgage debt and
securities linked to commercial- property loans.
The New York Fed bank, which is conducting the
$200 billion Term Securities Lending Facility
program, set the amount of the first auction on
March 27 at $75 billion. The new collateral list
will be applied in the first weekly auction
instead of the second, as originally intended.
Central-bank officials are increasing efforts to
ease logjams in credit markets that are
exacerbating the economic slowdown by making it
harder for companies and consumers to get loans.
Under the program, first announced on March 11,
the Fed will accept debt that's more difficult to
borrow against than Treasury notes, the world's
most liquid securities. ‘Everyone’s waiting for
help at financing some of these more difficult
mortgages,’ said Chris Rupkey, chief financial
economist at Bank of Tokyo-Mitsubishi…"
March 20 - Bloomberg (Liz Capo McCormick):
"Surging demand for US Treasuries is causing
failures to deliver or receive government debt in
the $6.3 trillion a day market for borrowing and
lending to climb to the highest level in almost
four years. Failures, an indication of scarcity,
surged to $1.795 trillion in the week ended March
5, the highest since May 2004… Investors seeking
the safety of government debt amid the loss of
confidence in credit markets pushed rates on
three-month bills today to 0.387%, the lowest
level since 1954… ‘It shows you the kind of
anxieties that are going on and the keen demand
for Treasuries,’ said Tony Crescenzi, chief bond
market strategist at Miller Tabak… ‘The rise in
fails tells us about the inability of dealers to
obtain Treasury collateral.’"
March 20 -
Dow Jones (Emily Barrett): "Money markets were
pushed to their limit Thursday in panicky trade
that recalls the worst moments of last summer's
liquidity crisis. Investors poured into the safest
corners of the government bond markets, for fear
of more bad news from the financial sector
upsetting markets shuttered for the Easter long
weekend, and sheltering from tumbling commodity
prices and sharp fluctuations in currencies. The
rush took yields on short-term Treasury bills to
lows not seen in 50 years, and borrowing costs
spiked higher in defiance of central banks'
efforts to flood the system with super-safe
collateral and additional cash. ‘Liquidity in the
bill market is nil,’ noted one trader… ‘The Street
has ceased making offerings for cash and as such
we cannot either.’"
March 19 - Bloomberg
(Sandra Hernandez): "Treasuries rose and
three-month bill rates plunged to the lowest level
in almost 50 years on speculation credit market
losses will widen, prompting investors to seek the
relative safety of government debt. Bonds gained
on concern the investment firm run by ex-Long-
Term Capital Management LP chief John Meriwether
is facing losses and Thornburg Mortgage Inc. may
go bankrupt… ‘It’s a capital preservation trade,’
said Michael Cloherty, an interest-rate strategist
at Banc of America… ‘The rationale is, ‘I’ll buy a
bill, I know that when the thing matures I’ll get
100 cents on the dollar.’"
March 19 - Dow
Jones (Matthew Cowley): "JPMorgan Chase may have
stepped in to save Bear Stearns, but that hasn’t
stopped investors from worrying about counterparty
risks. The weekend maneuver by JPMorgan and the
Federal Reserve seems to be more about preserving
Bear Stearn’s trades, rather than its business.
That’s why the firm’s shareholders are being wiped
out, but its mechanics will continue to operate
under the auspices of its acquirer, JPMorgan
Chase. Default by a counterparty is one of the
major threats pervading crucial parts of the
international financial system today; it's helped
spread fear far beyond the origins of this crisis
in the US subprime market. The extent to which the
Fed wants to avoid even testing a possible default
by a major counterparty is indicative in the speed
with which Bear's rescue plan was put together."
March 20 - Bloomberg (Andrew Frye):
"Thornburg Mortgage Inc., the ‘jumbo’ mortgage
specialist struggling to meet margin calls,
delayed the pricing of its $1 billion convertible
securities offering until March 24. ‘We are
continuing to work with interested, large
investors’ who are carrying out due diligence on
the sale…a
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