Page 1 of 3 CREDIT BUBBLE BULLETIN Just the facts
Market watch by Doug Noland
For another week in a historic period, the Dow declined 1.7% (down 16.3% y-t-d)
and the S&P500 fell 1.9% (down 15.6%). The Transports were hammered for
5.2% (down 2.9%), while the Utilities added 0.4% (down 5.2%). The Morgan
Stanley Cyclical index dipped 0.8% (down 18.9%), while the Morgan Stanley
Consumer index added 0.7% (down 11.6%). The Russell 2000 rallied 1.4% (down
11.9%) and the S&P400 Mid-Caps increased 0.1% (down 8.2%). The NASDAQ100
slipped 0.3% (down 13.1%), and the Morgan Stanley High Tech index dropped 1.5%.
The semiconductors sank 2.5% (down 15.3%), The Street.com Internet Index fell
1.6% (down 11.4%), and the NASDAQ Telecommunications index declined 1.6% (down
12.1%). The Biotechs gained 2.6%, reducing y-t-d losses to 3.0%. The
Broker/Dealers sank 6.6% (down 35.1%), and the Banks lost 4.9% (down 38.5%).
With Bullion gaining almost $31, the HUI gold index jumped 4.2% (up 11.0%).
One-month Treasury bill rates sank 41 bps this week to 1.37%, and 3-month
yields dropped 31 bps to to 1.57%. At the same time, two-year government yields
gained 6 bps to 2.60%. Five-year T-note yields were little changed at 3.28%,
while 10-year yields declined 2 bps to 3.95%. Long-bond yields were unchanged
at 4.53%. The 2yr/10yr spread declined 8 to 135 bps. The implied yield on
3-month December ’09 Eurodollars fell 10.5 bps to 3.905%. Benchmark Fannie MBS
yields declined 12 bps to 5.83%. The spread between benchmark MBS and 10-year
Treasuries declined 9 to 189. It was a wild day in the agency debt market, with
10-year Fannie and Freddie debt spreads narrowing an extraordinary 19 bps. For
the week, the spread on Fannie’s 5% 2017 note narrowed 13 bps to 67 bps, and
the spread on Freddie’s 5% 2017 note narrowed 12 bps to 68 bps. The 10-year
dollar swap spread declined 7.25 to 68.5. Corporate bond spreads were mixed to
wider. An index of investment grade bond spreads narrowed 6 to 149 bps, while
an index of junk bond spreads widened 5 bps to 542 bps.
July 7 - Bloomberg (Sandra Hernandez): "Treasury Inflation Protected Securities
aren’t living up to their name for bond investors who say they can’t trust the
way the US government calculates the rising cost of consumer goods. Morgan
Stanley ... and FTN Financial ... are telling clients to pare holdings of TIPS
... "
Investment grade issuance this week included Alcoa $1.5bn, TIAA Global $500
million, Heinz $500 million, Tyco $300 million, Magellan Midstream $250
million, and Northern Natural Gas $200 million.
No junk or convert issuers this week.
International dollar bond issuance included KFW $3.0bn, ANZ National $2.0bn,
and SABMiller $1.25bn.
German 10-year bund yields declined 5 bps to 4.44%. The German DAX equities
index fell 1.9% (down 23.7% y-t-d). Japanese 10-year "JGB" yields fell 5 bps to
1.59%. The Nikkei 225 declined 1.5% (down 14.8% y-t-d and 27.8% y-o-y).
Emerging markets were mostly under pressure. Brazil’s benchmark dollar bond
yields rose 7 bps to 5.90%. Brazil’s Bovespa equities index gained 1.5% (down
5.9% y-t-d). The Mexican Bolsa fell 2.6% (down 6.5% y-t-d). Mexico’s 10-year $
yields surged 10.5 bps to 5.63%. Russia’s RTS equities index was down 0.9%
(down 5.4% y-t-d). India’s Sensex equities index was little changed, with y-t-d
losses of 33.6%. China’s Shanghai Exchange index rallied 6.9%, lowering 2008
losses to 45.7%.
Freddie Mac 30-year fixed mortgage rates added 2 bps to 6.37% (down 36bps
y-o-y). Fifteen-year fixed rates dipped one basis point to 5.91% (down 48bps
y-o-y). One-year adjustable rates were unchanged at 5.17% (down 54bps y-o-y).
Bank Credit jumped $27.7bn to $9.373 TN (week of 7/2). Bank Credit has expanded
$160bn y-t-d, or 3.3% annualized. Bank Credit posted a 52-week rise of $753bn,
or 8.7%. For the week, Securities Credit jumped $41.1bn. Loans & Leases
fell $13.3bn to $6.847 TN (52-wk gain of $533bn, or 8.4%). C&I loans
dropped $9.5bn, with one-year growth slowing to 17.7%. Real Estate loans fell
$9.6bn (up 0.5% y-t-d). Consumer loans dipped $0.6bn, while Securities loans
gained $8.2bn. Other loans declined $1.8bn.
M2 (narrow) "money" supply dropped $23.6bn to $7.675 TN (week of 6/30). Narrow
"money" has expanded $212bn y-t-d, or 5.7% annualized, with a y-o-y rise of
$409bn, or 5.6%. For the week, Currency added $1.7bn, and Demand &
Checkable Deposits increased $16.5bn. Savings Deposits sank $34.4bn, while
Small Denominated Deposits gained $1.7bn. Retail Money Funds fell $9.3bn.
Total Money Market Fund assets (from Invest Co Inst) surged $49.6bn to $3.506
TN, with a y-t-d increase of $393bn, or 24.3% annualized. Money Fund assets
have posted a one-year increase of $926bn (35.9%).
Asset-Backed Securities (ABS) issuance this week increased to $2.5bn.
Year-to-date total US ABS issuance of $109bn (tallied by JPMorgan's Christopher
Flanagan) is running at 26% of the comparable level from 2007. Home Equity ABS
issuance of $303 million compares with 2007’s $206bn. Year-to-date CDO issuance
of $14.3bn compares to the year ago $236bn.
Total Commercial Paper fell $20.7bn to $1.759 TN, with a y-t-d decline of
$26.4bn. Asset-backed CP declined $5.7bn last week to $751bn, increasing 2008's
fall to $22bn. Over the past year, total CP has contracted $420bn, or 19.3%,
with ABCP down $427bn, or 36.2%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 7/9) increased
$4.4bn to a record $2.350 TN. "Custody holdings" were up $294bn y-t-d, or 26.5%
annualized, and $361bn year-over-year (18.2%). Federal Reserve Credit declined
$2.2bn to $887.9bn. Fed Credit has increased $14.4bn y-t-d (3.1% annualized)
and $33.6bn y-o-y (3.9%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi - were up $1.262 TN y-o-y, or 22.6%, to $6.849 TN.
Global Credit Market Dislocation Watch
July 12 - Reuters (Patrick Rucker): "Federal Reserve Chairman Ben Bernanke told
Freddie Mac chief Richard Syron that his company and Fannie Mae could take
advantage of the emergency discount window, according to two sources familiar
with the conversation ... Fed spokeswoman Michelle Smith said US central bank
officials were following the situation with struggling Fannie Mae and Freddie
Mac closely but disputed that access to the discount window had been offered
... On Friday night, a Fed spokeswoman confirmed that there had been a call
between Bernanke and Syron on Thursday initiated by Syron. But she said there
was no discussion during that call about Freddie Mac or Fannie Mae accessing
the discount window. However, two sources familiar with the conversation
between Syron and Bernanke later affirmed the conversation and what was said
about potential discount window action. The two sources said Bernanke and Syron
spoke by phone Thursday afternoon and in that call the central bank chief said
he intended the discount window to be opened if necessary to Fannie Mae and
Freddie Mac."
July 8 - Bloomberg (Rebecca Christie): "Treasury Secretary Henry Paulson said
Fannie Mae and Freddie Mac’s efforts to raise capital will let them inject more
funds into mortgage markets and alleviate the housing crisis. ‘I am pleased
that this spring’ both firms ‘committed to raise more capital,’ Paulson said
... ‘Fresh capital will strengthen their balance sheets and allow them to
provide additional mortgage capital.’"
July 9 - Dow Jones: "Mortgage financiers Freddie Mac and Fannie Mae are both
‘adequately capitalized’ at current levels, the head of the Office of Federal
Housing Enterprise Oversight said ... Ofheo Director James Lockhart ... said
Fannie’s $15 billion capitalization is enough for the company ‘to ride out the
storm’ in the housing market over coming months. He also said recent pledges by
Freddie to seek $5.5 billion in fresh investment would help sustain that
company as well."
July 9 - Bloomberg (Shannon D. Harrington and Dawn Kopecki): "Fannie Mae and
Freddie Mac, ranked Aaa by the world’s largest credit-rating companies, are
being treated by derivatives traders as if they are rated five levels lower.
Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest US
mortgage finance companies are trading at levels that imply the bonds should be
rated A2 by Moody’s ... Traders are overlooking the government’s implied
guarantee of the debt as credit losses grow and concern rises that the
companies don’t have enough capital to weather the biggest housing slump since
the Great Depression."
July 10 - Bloomberg (Dawn Kopecki): "Borrowing at Fannie Mae, the US
government-sponsored mortgage company, has never been so expensive and it may
not get better any time soon. Fannie Mae paid a record yield relative to
Treasuries on the sale of $3 billion in two-year notes yesterday amid concern
the biggest provider of financing for US home loans won't have enough capital
to weather the worst housing slump since the Great Depression. The company’s
credit-default swaps show traders are treating the AAA rated debt as if it were
five steps lower ... Chances are increasing that the US may need to bail out
Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve
President William Poole said ... ‘Congress ought to recognize that these firms
are insolvent, that it is allowing these firms to continue to exist as bastions
of privilege, financed by the taxpayer,’ Poole, 71, who left the Fed in March,
said ... "
July 11 - Dow Jones (Michael R. Crittenden): "The regulator for Fannie Mae and
Freddie Mac on Thursday afternoon took the dramatic step of publicly addressing
the firms’ capital position in an effort to calm jittery Wall Street investors.
James Lockhart, director of the Office of Federal Housing Enterprise Oversight,
repeated an assurance he made earlier this week that the two mortgage-finance
firms are ‘adequately capitalized.’ ‘They have large liquidity portfolios,
access to the debt market and over $1.5 trillion in unpledged assets,’ Lockhart
said ... "
July 11 - New York Times (Stephen Labaton and Steven R. Weisman): "Alarmed by
the growing financial stress at the nation’s two largest mortgage finance
companies, senior Bush administration officials are considering a plan to have
the government take over one or both of the companies and place them in a
conservatorship if their problems worsen, people briefed about the plan said on
Thursday."
July 11 - Bloomberg (Shannon D. Harrington): "The US government should increase
its $2.25 billion credit line to Fannie Mae and Freddie Mac to as much as $100
billion to bolster investor confidence that it won’t allow them to fail,
according to Barclays Capital. The government should expand the credit line to
at least $50 billion as a ‘grand gesture’ to ease investor concern, Ajay
Rajadhyaksha, head of US fixed income strategy at Barclays Capital in New York,
said ... "
July 11 - Financial Times (Nicole Bullock and Paul J Davies): "Global issuance
of the complex debt securities at the heart of the credit bubble has collapsed
in the wake of thousands of ratings downgrades this year ... The volume of
collateralised debt obligations, which pool together bonds, loans and other
debt, sold in the first half of this year is equivalent to just 10% of the
volume in the first half of 2007, according to ... Dealogic and Total
Securitization."
July 11 - Bloomberg (Shelley Smith and John Glover): "Company bond sales in
Europe kept near the lowest levels of 2008 this week ... Sales fell to 4.3
billion euros ($6.8bn), down 66% from the weekly average ... for the past year
... "
July 7 - Dow Jones (Toru Fujioka): "Standard & Poor’s ... said problems in
US credit markets may affect students’ ability to repay their loans as a
particularly high number of students enroll in college this fall. ‘Potential
problems include a higher rate of student loan defaults nationwide, students
with fair or even good credit records experiencing difficulty in getting
private loans and less-endowed institutions seeing their budgets squeezed,’
credit analyst Bobbi Gajwani said."
Global Inflation Turmoil Watch
July 7 - The Wall Street Journal (Roger Bate): "Amid Zimbabwe’s political
violence is an economic lesson for anyone who doesn’t keep an eye on inflation
... With food aid only trickling back into the country and hundreds of
thousands without enough cash to buy food, it was clear during a trip there
last month that the crisis is deepening. Consumer prices have more than doubled
every month this year, in some cases doubling every week. A conservative
estimate provided by Robertson Economic Information Services, a Southern
African consultancy, says that prices are now three billion fold greater than
seven years ago ... The exchange rate is currently an astronomical 90 billion
Zimbabwe dollars to one US dollar ... Buying anything is a ‘bizarre
experience,’ said Lucy Chimtengwende from Bulawayo, who spent $12 US on lunch
recently, with the bill in local currency being an astonishing 1.1 trillion
Zimbabwe dollars. The menu had no prices on it, she told me by phone, prices
are quoted to you and are constantly changing. And if you want to pay by check,
good luck. Most proprietors don’t accept them, and for those that do, the price
is double, given the time it takes the vendor to receive payment."
July 8 - AFP: "Soaring food and fuel prices could spark
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