Page 2 of
5 CREDIT BUBBLE
BULLETIN Liquidation is only solution to
crisis Commentary and weekly
watch by Doug Noland
From Friday evening's
vantage point, recent extraordinary government
measures to "back" US finance appear likely to
delay the adjustment process - what I will be
referring to as a "depression." This reprieve,
however, comes with a cost. It will ensure
significantly greater damage to the core of our
monetary system, as well as requiring a more
onerous real economy liquidation with the
inevitable onset of the more serious phase of the
unfolding crisis.
WEEKLY
WATCH For the week, the Dow jumped 3.2%
(down 4.9% y-t-d) and the S&P500 surged 4.2%
(down 6.7%). The Morgan Stanley Cyclical
index gained 5.7% (down
2.8%) and the Transports rose 4.7% (up 8.9%). The
S&P Homebuilding index jumped 12.7%,
increasing y-t-d gains to 24.6%. The Morgan
Stanley Retail index rose 7.2% (unchanged). The
Utilities increased 4.4% (down 7.7%), and the
Morgan Stanley Consumer index added 1.7% (down
4.9%). The broader market rallied sharply. The
small cap Russell 2000 gained 4.5% (down 6.8%) and
the S&P400 Mid-Caps jumped 5.5% (down 5.0%).
The NASDAQ100 rallied 5.6% (down 10.5%), and the
Morgan Stanley High Tech index rose 5.1% (down
10.9%). The Semiconductors surged 8.8% (down
9.6%), the Street.com Internet Index 3.4% (down
8.8%), and the NASDAQ Telecommunications index
3.2% (down 8.3%). The Biotechs surged 7.4%,
reducing y-t-d losses to 1.8%. The Broker/Dealers
spiked 9.7% higher (down 20.2%), and the Banks
rallied 4.8% (down 6.9%). Bullion declined $17.25,
yet the HUI Gold index mustered a 0.3% gain (up
10.1%).
One-month Treasury bill rates
jumped 12 bps this past week to 1.49%, while
3-month yields dipped 3 bps to 1.37%. Two-year
government yields jumped 16.5 bps to 1.81%.
Five-year T-note yields rose 10 bps to 2.61%, and
ten-year yields added 3 bps to 3.47%. Long-bond
yields dipped one basis point to 4.31%. The
2yr/10yr spread ended the week about 15 narrower
at 166 bps. The implied yield on 3-month December
’08 Eurodollars rose 7.5 bps to 2.31%. Benchmark
Fannie MBS yields declined 8 bps to 5.17%. The
spread between benchmark MBS and Treasuries
narrowed 10 to 170 bps. The spread on Fannie’s 5%
2017 note narrowed 5 to 64.5 bps and the spread on
Freddie’s 5% 2017 note narrowed 6 to 64 bps. The
10-year dollar swap spread declined 4.75 to 63.
Corporate bond spreads were mostly narrower. An
index of investment grade bond spreads narrowed 30
to 111 bps. Meanwhile, an index of junk bond
spreads widened 6 to 638 bps.
Investment
grade issuance included Oracle $5.0bn, Verizon
$4.0bn, Citigroup $4.5bn, Enterprise Products
$1.1bn, John Deere $1.0bn, Con Edison NY $1.2bn,
Enbridge Energy $800 million, Metlife $750
million, Norfolk Southern $600 million, Questar
Market Resources $450 million, Illinois Power $330
million, Ameren $300 million, Private Export
Funding $300 million, and Ameren Union Electric
$250 million.
Junk issuers included Ipalco
Enterprises $400 million and Nustar Logistics $350
million.
Convert issuance this week
included Alpha Natural Resources $250 million, SVB
Financial $200 million and Alaska Communications
Systems $110 million.
International dollar
bond issuance included Rabobank $3.25bn, Vivendi
$1.4bn, Ontario $1.0bn, Wesfarmers $650 million,
and European Investment Bank $100 million.
German 10-year bund yields were little
changed at 3.94%, as the DAX equities index
rallied 3.1% (down 16.2% y-t-d). Japanese 10-year
"JGB" yields increased 6 bps to 1.33%. The Nikkei
225 jumped 3.7% (down 13.2% y-t-d and 24.2%
y-o-y). Emerging debt and equities were mostly
stronger. Brazil’s benchmark dollar bond yields
sank 18 bps to 6.15%. Brazil’s Bovespa equities
index surged 6.3% (up 0.6% y-t-d). The Mexican
Bolsa rose 5.0% (up 6.9% y-t-d). Mexico’s 10-year
$ yields sank 10 bps to 4.80%. Russia’s RTS
equities index added 0.5% (down 10.1% y-t-d).
India’s Sensex equities index dropped 6.3%,
boosting y-t-d losses to 24.4%. China’s Shanghai
Exchange recovered 1.0% this week, with 2008
losses at 34.5%.
Freddie Mac 30-year fixed
mortgage rates gained 3 bps this week to 5.88%
(down 29bps y-o-y). Fifteen-year fixed rates
jumped 8 bps to 5.42% (down 45bps y-o-y). One-year
adjustable rates declined 5 bps to 5.19% (down 25
bps y-o-y).
Bank Credit declined $30.4bn
(week of 3/26) to $9.535 TN (previous weeks
revised higher). Bank Credit has now increased
$322bn y-t-d, or 14.0% annualized. Bank Credit
posted a 36-week surge of $891bn (14.9%
annualized) and a 52-week rise of $1.185 TN, or
14.2%. For the week, Securities Credit declined
$5.9bn. Loans & Leases dropped $24.5bn to
$6.932 TN (36-wk gain of $607bn). C&I loans
rose $8.2bn, with one-year growth of 23%. Real
Estate loans slipped $2.8bn. Consumer loans were
little changed, while Securities loans declined
$14.3bn. Other loans dropped $15.4bn. Examining
the liability side, Large Time Deposits declined
$20.9bn, while Other jumped $58.8bn.
M2
(narrow) "money" supply surged $32.2bn to a record
$7.721 TN (week of 3/24). Narrow "money" has now
expanded $258bn y-t-d, or 15.0% annualized, with a
y-o-y rise of $536bn, or 7.5%. For the week,
Currency increased $1.4bn, and Demand &
Checkable Deposits jumped $10.4bn. Savings
Deposits rose $5.1bn, and Small Denominated
Deposits added $0.8bn. Retail Money Fund assets
advanced $14.4bn.
Total Money Market Fund
assets (from Invest Co Inst) declined $7.6bn last
week to a record $3.498 TN, while posting a y-t-d
gain of $385bn, or 49.4% annualized. Money Fund
assets have posted a 36-week rise of $914bn (51%
annualized) and a one-year increase of $1.066 TN
(43.8%).
Asset-Backed Securities (ABS)
issuance slowed to about $500 million.
Year-to-date total US ABS issuance of $47.8bn
(tallied by JPMorgan's Christopher Flanagan) is
running only 22% of the comparable level from
2007. Home Equity ABS issuance of $197 million is
a fraction of comparable 2007's $117bn.
Year-to-date CDO issuance of $11bn compares to the
year ago $118bn.
Total Commercial Paper
declined $5.1bn to $1.828 TN. CP has declined
$396bn over the past 34 weeks. Asset-backed CP
increased $8.3bn (34-wk drop of $409bn) to $786bn.
Over the past year, total CP has contracted
$213bn, or 10.4%, with ABCP down $295bn, or 27.3%.
Fed Foreign Holdings of Treasury, Agency
Debt last week (ended 4/2) jumped $21.8bn to a
record $2.206 TN. "Custody holdings" were up
$149.7bn y-t-d, or 27% annualized, and $313bn
year-over-year (16.6%). Federal Reserve Credit
increased $6.1bn to $876.6bn. Fed Credit has
expanded $2.1bn y-t-d, while having increased
$23.3bn y-o-y (2.7%).
Global Credit
Market Dislocation Watch March 28 -
Financial Times (Paul J Davies): "Global debt
issuance collapsed in the first quarter as the
credit crunch took its toll on new deals in all
sectors… Total debt market volumes were $1,030bn
in the first quarter, a 48% drop compared with the
same quarter a year ago, while total syndicated
loan market volumes were $599bn, a 47% drop versus
the same period last year, according to Dealogic…
The numbers illustrate how the withdrawal of
liquidity from the world’s debt markets in the
wake of the turmoil that began in the US mortgage
markets has affected everything from the safest
corporate borrower to the most risky private
equity backed leveraged buy-out deal. Structured
finance markets, which cover mortgage-backed bonds
and complex products such as collateralised debt
obligations, unsurprisingly suffered the worst
contractions. Globally, new deal volumes of just
$81.5bn were 89% less than the first quarter of
2007. This volume was the lowest since the first
quarter of 1996."
April 1 - Reuters
(Mathieu Robbins): "Global mergers and
acquisitions slumped by almost a third in the
first quarter, according to… Thomson Financial…
Global M&A volumes fell 31% to $661 billion in
the first quarter of 2008… Buyout firms led the
collapse in deals as their buying power evaporated
and they saw a 77% fall in acquisitions after 6
years’ growth."
April 1 - The Wall Street
Journal (Randall Smith): "The turmoil in debt
markets took a huge bite out of Wall Street sales
of stocks and bonds in the first quarter… Global
first-quarter underwriting volume tumbled 45% from
a year earlier to $1.27 trillion, and fees
collected by Wall Street investment banks fell 47%
to $5.8 billion, according to Thomson Financial…
It was the third consecutive quarterly total below
$1.5 trillion. In 2006 and the first half of 2007,
the quarterly average was $2.1 trillion. Both
first-quarter totals were the lowest in five
years… ‘As quarters go, it’s as tough as it gets,’
said Matthew Johnson, head of global equity
syndicate at Lehman Brothers Holdings Inc… The
first-quarter volume for new junk-bond issues was
the slowest first quarter since 1995…The same
headwinds cut the volume of buyout loans by 88% to
just $5.4 billion, according to Reuters Loan
Pricing Corp. Overall loan volume fell by 55% to
$166 billion…"
April 1 - The Wall Street
Journal (Matthew Karnitschnig and Dana Cimilluca):
"Prepare for more pain. That is the message
circulating through Wall Street’s
mergers-and-acquisitions departments following the
biggest quarterly decline in six years in the
dollar value of deals announced… The first quarter
met the predictions of the most pessimistic
forecasters. The value of all global deals fell
24% from the first quarter of 2007 to $736
billion… In the US, deal volume fell 41% to $204
billion. In Europe, the drop was less severe, with
a 17% decline to $305 billion…"
March 31 -
Reuters (Dena Aubin): "US investment-grade
corporate bond issuance plunged 31% in the first
quarter to $185 billion as convulsions from a
global credit crisis hurt demand, Thomson
Financial reported… Junk bond issuance plummeted
by 85% to $5.9 billion, down from $38.5 billion a
year earlier… The slump followed a record year for
high-grade corporate issuance, with $978 billion
in sales, including $269 billion in the first
quarter of 2007."
April 1 - Reuters: "US
mortgage-backed securities issuance fell by more
than 75% in the first quarter of 2008 from the
same period a year earlier… Thomson Financial said
US mortgage-backed securities issuance totaled
$61.0 billion in the first quarter… The period
marked the slowest quarter for issuance of US MBS
since the fourth quarter of 2000…"
March
31 - Reuters (Nancy Leinfuss): "US issuance of
asset-backed securities tumbled 83% in this year’s
first quarter as investors fled the risky subprime
mortgage segment that fueled a global credit
crisis in 2007. ABS issuance slumped to $54.7
billion in this year’s first quarter compared with
the $323.3 billion sold in the year-ago quarter,
Thomson Financial said…"
April 1 (Reuters)
- US municipal bond issuance fell 23% in the first
quarter from a year ago as a global credit crunch
made it harder for states and cities to refinance
old debt and hurt demand, Thomson Financial said…
US states, cities and counties sold $81.6 billion
of bonds in the first quarter to pay for new
schools, road maintenance and other public
projects compared to $106.5 billion in the same
period in 2007…"
March 31 - Bloomberg
(Jeremy R. Cooke): "US municipal bonds are off to
their worst annual start in 12 years… Tax-exempt
bonds fell 1% for the year through March 28, their
worst first-quarter performance since a 1.25%
decline in 1996…"
April 2 - Financial
Times (Paul J Davies): "UBS’s mind-boggling $19bn
first-quarter writedown…came as news emerged of
the radical strategies being discussed at the
highest levels of the Financial Stability Forum in
Rome to bring a halt to the credit crisis. Both
stories show that the markets for bonds backed by
mortgage and other debts are part of a global game
of chicken involving central banks on one side and
investors with cash to put to work on the other.
Who blinks first in this game - and, more
important, when - will have a significant impact
on the health of banks, housing markets and
potentially the biggest economies of the world. No
investor wants to put money into such debt until
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