Page 2 of 3 CREDIT BUBBLE BULLETIN The cost of credit seizure
Commentary and weekly watch by Doug Noland
investment grade bond spreads widened 10 to 110 bps, and an index of junk bond
spreads widened 26 to 612 bps.
Investment grade issuance included Kinder-Morgan $2.15bn, Suncor $2.0bn, Humana
$750 million, Ply Gem Industries $700 million, Hartford Financial $500 million,
Southwestern Electric Power $400 million, Panhandle Eastern $400 million,
Detroit Edison $300 million, and Northeast Utilities $250 million.
Junk issuers included Airgas $400 million, Iron Mountain $300 million,
Scientific Games $200 million, Cenveo $175 million, and TTM Technologies $175
million.
Convert issuance this week included Netapp $1.1bn, Jetblue $200
million, and Palm Harbor $75 million.
International dollar bond issuance included KFW $3.0bn, National Australia Bank
$2.0bn, and Panama $1.15bn.
German 10-year bund yields dipped 2 bps to 4.42%. The German DAX equities index
has hit for 4.1% (down 15.7% y-t-d). Japanese 10-year "JGB" yields rose 3.5 bps
to 1.785%. The Nikkei 225 gained 1.1% (down 5.3% y-t-d and 19.7% y-o-y).
Emerging equities were mostly lower, while debt markets performed better.
Brazil’s benchmark dollar bond yields were little changed at 6.05%. Brazil’s
Bovespa equities index fell 3.9% (up 9.2% y-t-d and 34.1% y-o-y). The Mexican
Bolsa dropped 2.6% (up 5.5% y-t-d). Mexico’s 10-year $ yields sank 15 bps to
5.05%. Russia’s RTS equities index fell 3.3% (up 3.8% y-t-d). India’s Sensex
equities index sank 5.1%, boosting y-t-d losses to 23.2%. China’s Shanghai
Exchange declined 3.0%, with 2008 losses at 36.7%.
Freddie Mac 30-year fixed mortgage rates added one basis point to 6.09% (down
44bps y-o-y). Fifteen-year fixed rates slipped one basis point to 5.65% (down
57bps y-o-y). One-year adjustable rates dropped 16 bps to 5.06% (down 59 bps
y-o-y).
Bank Credit dropped $24.9bn to $9.380 TN (week of 5/28). Bank Credit has
expanded $167bn y-t-d, or 4.3% annualized. Bank Credit posted a 52-week rise of
$806bn, or 9.4%. For the week, Securities Credit dropped $25.2bn. Loans &
Leases were little changed at $6.911 TN (45-wk gain of $586bn, or 10.7%
annualized). C&I loans added $1.1bn, with one-year growth of 20.5%. Real
Estate loans fell $5.7bn (up 3.6% y-t-d). Consumer loans increased $1.5bn, and
Securities loans gained $4.4bn. Other loans slipped $1.0bn. Examining the
liability side, "Other Liabilities" dropped $22.4bn.
M2 (narrow) "money" supply jumped $14.4bn to a record $7.704 TN (week of 5/26).
Narrow "money" has expanded $241bn y-t-d, or 8.0% annualized, with a y-o-y rise
of $475bn, or 6.6%. For the week, Currency gained $2.7bn, and Demand &
Checkable Deposits rose $8.5bn. Savings Deposits increased $15.7bn, while Small
Denominated Deposits declined $1.8bn. Retail Money Funds dropped $10.7bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $31.5bn last week
to $3.448 TN, reducing the y-t-d rise to $335bn, or 25.4% annualized. Money
Fund assets have posted a one-year increase of $922bn (36.5%).
Asset-Backed Securities (ABS) issuance increased this week to $5.4bn.
Year-to-date total US ABS issuance of $94bn (tallied by JPMorgan's Christopher
Flanagan) is running 26% of the comparable level from 2007. Home Equity ABS
issuance of $303 million compares with 2007's $179bn. Year-to-date CDO issuance
of $13.8bn compares to the year ago $193bn.
Total Commercial Paper increased $1.4bn to $1.755 TN. CP has declined $470bn
over the past 43 weeks. Asset-backed CP declined $1.0bn last week (43-wk drop
of $442bn) to $753bn. Over the past year, total CP has contracted $360bn, or
17%, with ABCP down $392bn, or 34%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 6/4) gained
$8.6bn to a record $2.301 TN. "Custody holdings" were up $245bn y-t-d, or 27%
annualized, and $346bn year-over-year (18%). Federal Reserve Credit slipped
$0.3bn to $877.7bn. Fed Credit has expanded $4.2bn y-t-d, while having
increased $27.4bn y-o-y (2.3%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi – were up $1.426 TN y-o-y, or 26%, to a record $6.836 TN.
Global Credit Market Dislocation Watch
June 6 – Dow Jones (Romy Varghese): "Credit derivatives investors reeled at the
renewed prospect of ratings downgrades to bond insurers Wednesday, sending the
cost of credit protection on MBIA Inc. and Ambac Financial Group deeper into
levels typically seen for distressed companies. Moody’s… said it would likely
strip the two largest bond insurers of their top triple-A credit rating, which
would further weaken the companies’ already battered business… Meanwhile, the
$2.6 trillion municipal bond market held steady, but participants noted that
the possibility of a deep downgrade to MBIA and Ambac, or cuts to other firms
considered more stable, may hurt the market."
June 2 – Bloomberg (Jody Shenn): "Issuance of collateralized loan obligations
has fallen 73% this year as investors avoid securities that can’t easily be
resold, according to JPMorgan Chase & Co. Creation of CLOs, which package
high-yield company loans into securities with varying risks, totaled $13
billion this year through May, compared with $49 billion in the same period of
2007, according to…Chris Flanagan. The market for other types of collateralized
debt obligations remains ‘entirely shut down,’ they wrote."
June 4 – Financial Times (David Oakley and Martin Arnold): "The standards of
leveraged loans used to fund private equity buy-outs have loosened in Europe
this year in spite of the credit crisis, sharply raising the risk of corporate
defaults, Standard & Poor’s warned… Record levels of leverage in deals,
rising purchase price multiples and the falling ratio of cash that companies
have available to cover debt will make it harder for them to repay their loans
and put pressure on default rates, the ratings agency said. ‘Just because
investors are demanding more conservative structures does not mean they are
getting them, it said. The ratings agency said this was surprising, given that
defaults are expected to rise sharply this year."
June 5 – Bloomberg (Lukanyo Mnyanda): "The cost of borrowing in euros for three
months rose to match the highest level since Dec. 18, according to the European
Banking Federation. The euro interbank offered rate… rose 1 basis point to
4.87%…"
June 6 – Bloomberg (Darrell Preston): "Franklin Biddar wants his money, and
says Bank of America Corp. won’t let him have it. The 65-year-old real estate
investor… said he hasn’t had access to money the bank invested for him in
auction-rate preferred shares ever since the market seized up in mid-February.
Even when Biddar agreed to sell $100,000 worth of the securities to Fieldstone
Capital Group, … Bank of America wouldn’t release the bonds, saying the
transaction wasn’t in his interest, he said."
Global Inflation Turmoil Watch
June 5 – Bloomberg (Simon Kennedy): "Asian governments are falling behind in
their battle against record oil prices, risking public protests, higher
interest rates and slower growth. Indian Prime Minister Manmohan Singh and his
Malaysian counterpart, Abdullah Ahmad Badawi, relaxed fuel price controls
yesterday, joining Indonesia, Taiwan, Pakistan and Sri Lanka in boosting costs
for business and consumers. The moves will drive India’s inflation to 8.5%, a
13-year high… Malaysia’s consumer-price growth may double to more than 7% this
month… Central banks in the region may also follow Pakistan in raising rates,
as policy makers lose bets that a global slowdown would temper price increases…
This is going to cost these governments politically,’ Michael Spencer, Hong
Kong-based chief economist for Asia at Deutsche Bank AG, said… ‘The governments
are basically saying they can’t keep subsidizing fuel.’"
June 6 – Associated Press (Ramola Talwar Badam): "Angry consumers blocked rail
tracks and roads and shut down businesses in parts of India for a second day
Friday to protest a hike in fuel prices by the government, while Malaysia
defended its decision to end fuel subsidies… In Malaysia an opposition party
held small protests Thursday to denounce that country’s sudden fuel price rises
as excessive and a burden for the poor after the government’s move earlier this
week to end heavy subsidies. A coalition of opposition parties and
non-governmental groups has called for rallies on July 12. India’s federal and
state governments scrambled to contain the protests there."
June 4 – Financial Times (John Burton): "Malaysia will raise petrol prices by
more than 40% from Thursday as it seeks to rein in government spending on fuel
subsidies at the cost of ending a low inflation policy. Government officials
said Malaysia was in danger of spending M$50bn ($15bn) on fuel subsidies this
year if government-set prices for petrol and diesel were not raised… Before
today’s increase, Malaysia’s fuel subsidy acญcounted for nearly a third
of total government spending and was equivalent to about 7% of gross domestic
product… The fuel price increase was bigger than those recently announced by
Taiwan, Indonesia and India, which raises its fuel prices by 10% from
Thursday."
June 4 – Bloomberg (Kartik Goyal and Soraya Permatasari): "India and Malaysia
were forced to raise fuel prices after crude oil almost doubled in a year,
risking fanning inflation and social unrest. Gasoline will rise 11% in India’s
capital New Delhi… Pump prices in Malaysia will increase 41%... Asian nations
are grappling with record crude prices that have raised the cost of subsidies
and caused losses for refineries… ‘The countries in Asia, which are dependent
on imports, will have to live with the specter of accelerating inflation and
slowing economic growth this year,’ said Kaushik Das, an economist with
Mumbai-based Kotak Mahindra Bank Ltd."
June 3 – Bloomberg (Sungwoo Park): "South Korea, struggling to rein in the
highest inflation in seven years stoked by surging oil and food costs, may
release rice and frozen fish from state reserves and intensify a crackdown on
steel hoarding to cool prices."
June 3 – The Wall Street Journal (James Hookway): "A proliferation of labor
strikes in Vietnam is dragging foreign manufacturers into the country’s
worsening inflation crisis, while Hanoi's Communist leaders struggle to keep
rising prices under control… The strikes reflect the anger of the tens of
thousands of Vietnamese who have left rural farming communities to seek work in
the new industrial zones around Hanoi and Ho Chi Minh City, only to see the
buying power of their wage packets dwindle amid rising food and fuel costs.
According to government statistics, about 300 strikes took place in the first
quarter, up from 103 strikes recorded in the first quarter of last year."
June 6 – Financial Times (Simeon Kerr): "The sovereign ratings of Middle
Eastern states could be hit by the political and economic risks caused by
soaring inflation across the region, Moody’s…said… Poorer regional states, such
as Egypt and Jordan, are most likely to be affected in the short term, as
inflation prompts strikes and fiscal loosening by governments under pressure…
‘Given enhanced sensitivities to the risk of social unrest, some governments in
the Middle East are finding it difficult to maintain fiscal discipline,’ said
Tristan Cooper, Moody’s senior sovereign analyst…"
June 3 – Bloomberg (Fiona MacDonald): "Kuwait will tighten controls on prices
and increase subsidies on staple consumer goods, the state-run news agency KUNA
reported… Inflation in Kuwait accelerated to a record 10.1% in February…"
June 2 – Gulf Times: "Though the Arabian Gulf is reaping a windfall from
sky-high oil prices, soaring food prices have hit countries such as Saudi
Arabia, Abu Dhabi and Qatar hard. The Gulf nations have to import more than 80%
of the food needed for their rapidly growing populations. To brake the runaway
inflation that is fuelled by high food costs, Gulf rulers have a new strategy.
They are buying unused agricultural land in countries such as Pakistan,
Thailand, and Sudan and turn to large-scale farming."
June 3 – Bloomberg (Matthew Brown): "Abu Dhabi plans new measures to control
price and salary increases as it seeks to curb inflation, Emirates Business
24/7 reported, citing a government report."
June 5 – Bloomberg (Mike Cohen): "Rising food prices could fuel political
instability that African governments will be unable to contain, said Jacob
Zuma, leader of South Africa's ruling African National Congress. ‘The issue of
food prices is actually a time bomb,’ Zuma said at a World Economic Forum
meeting… ‘An uprising could emerge. I don’t think there is lots that
governments could do.’ Rising food prices have sparked protests across the
continent in countries including Kenya, Ivory Coast, Cameroon and South Africa…
‘Oil prices are driving up food in a way we cannot deal with,’ South African
Finance Minister Trevor Manuel said… Governments in rich nations must to do
more to contain food demand or ‘the wealthy are going to take everything,
leaving the poor destitute."
June 5 – Financial Times (Barney Jopson): "Food prices in Kenya rose 44% in the
year to May reflecting a combination of global trends and the after-effects of
the country’s post-election turmoil earlier this year. Overall inflation in
Kenya rose to 31.5% year-on-year, the highest rate since the early 1990s… Kenya
experienced its first small-scale protests over soaring food costs in Nairobi
at the weekend, but analysts fear that continued inflation in months to come
could stoke more serious unrest among the urban poor."
Currency Watch
The dollar index declined 0.7% to 72.39. For the week on the upside, the
Swedish krona increased 2.1%, the Norwegian krone 2.1%, the Swiss franc 1.9%,
the Euro 1.6%, the Danish krone 1.6%, and the Australian dollar 0.8%. On the
downside, the New Zealand dollar declined 2.2%, the South African rand 2.2%,
the Canadian dollar 1.8%, the South Korean won 0.9%, and the Taiwanese dollar
0.9%.
Commodities Watch
A week for the commodities history book. Gold gained 1.8% to $902.25, and
Silver 3.4% to $17.43 - although the metals were the relatively quiet sector.
July Crude surged $10.81 to a record $138.16. July Gasoline jumped 5.4% (up 38%
y-t-d), and July Natural Gas surged 8.2% (up 69% y-t-d). August heating oil
traded limit up today, posting a one week gain of 8.2%. July Copper added 0.5%.
July Wheat jumped 6.5%. The CRB index surged 4.6% to a new record high (up
23.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 7.1% (up 38%
y-t-d and 79% y-o-y).
China Watch
June 6 – Bloomberg (Tian Ying): "China’s passenger-car sales
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