Page 1 of 5 CREDIT BUBBLE BULLETIN Just the facts
Commentary and market watch by Doug Noland
A week of hyper-volatility ended with mostly slight declines in the major
averages, as the markets absorbed the implications of the Fannie Mae and
Freddie Mac rescue package. Smaller companies, however, as captured by the
Russell 2000, strengthened even as reports said loans were increasingly
difficult to come by.
For the week, the Dow declined 1.1% (down 14.3% year-to-date) and the
S&P500 slipped 0.2% (down 14.3%). The Morgan Stanley Cyclicals dipped 0.4%
(down 15.9%), while the Morgan Stanley Consumer index mustered a 0.1% gain
(down 9.8%). The Transports declined 0.9% (up 8.5%), and the Utilities were
smacked for 2.4% (down 11.4%). The broader market fared better. The small cap
Russell 2000 jumped 2.5%, lowering 2008 losses
to 7.3%. The S&P400 Mid-Caps slipped only 0.6%, also down 7.3%
year-to-date. The NASDAQ100 gained 1.3% (down 11.4%), and the Morgan Stanley
High Tech index declined 0.6% (down 11.5%). The Semiconductors were hammered
for 7.7% (down 11.5%). The Street.com Internet Index added 0.6%, and the NASDAQ
Telecommunications index surged 6.8% (down 6.4%). The Biotechs jumped 4.8%,
increasing 2008 gains to 6.0%. The Broker/Dealers fell 6.0% (down 30.3%), while
the Banks recovered 0.7% (down 28.7%). With Bullion sinking $25, the HUI gold
index dropped 6.4% (down 0.1%).
One-month Treasury bill rates jumped 44 bps this week to 1.73%, and 3-month
yields rose 20 bps to 1.72%. Two-year government yields gained 6 bps to 2.70%.
Five-year T-note yields increased 3 bps to 3.44%, and 10-year yields added 2
bps to 4.10%. Long-bond yields increased 3 bps to 4.69%. The 2yr/10yr spread
narrowed 5 to 140 bps. The implied yield on 3-month December '09 Eurodollars
declined 2 bps to 4.105%. Benchmark Fannie MBS yields fell back 7 bps to 6.08%.
The spread between benchmark MBS and 10-year Treasuries narrowed 8 to a still
quite wide 198. The spread on Fannie's 5% 2017 note narrowed 10 bps to 63 bps,
and the spread on Freddie's 5% 2017 note narrowed 10 bps to 64 bps. The 10-year
dollar swap spread declined 6.5 to 69.5. Corporate bond spreads were mostly
narrower. An index of investment grade bond spreads narrowed 5 to 140 bps, and
an index of junk bond spreads narrowed 10 to 548 bps.
It was another light week of corporate debt issuance. Investment grade issuance
this week included Dupont $2.0bn and IBM $1.0bn.
Junk issuers included XM Satellite $780 million.
Convert issuers this week included Alliance Data $700 million.
International dollar bond issuance included Taqa Abu Dhabi $1.5bn, Severstal
$1.25bn, GAZ Capital $500 million, and Alpha Bank $250 million.
German 10-year bund yields rose 3 bps to 4.60%. The German DAX equities index
recovered 0.8% (down 20.2% year-to-date). Japanese 10-year "JGB" yields added
one basis point to 1.57%. The Nikkei 225 jumped 3.5% (down 12.9% year-to-date
and 25.3% y-o-y). Emerging markets were volatile and ended the week mixed.
Brazil's benchmark dollar bond yields declined 5 bps to 5.91%. Brazil's Bovespa
equities index sank 4.6% (down 10.5% year-to-date). The Mexican Bolsa fell 3.9%
(down 8.3% year-to-date). Mexico's 10-year $ yields rose 6.5 bps to 5.58%.
Russia's RTS equities index sank 8.6% (down 14.8% year-to-date). India's Sensex
equities index rallied 4.7%, cutting year-to-date losses to 29.6%. China's
Shanghai Exchange index gained 3.1%, lowering 2008 losses to 45.5%.
Freddie Mac 30-year fixed mortgage rates surged an extraordinary 37 bps to an
11-month high 6.63% (down 6bps y-o-y). Fifteen-year fixed rates jumped 40 bps
to 6.18% (down 19bps y-o-y), and one-year adjustable rates rose 39 bps to 5.49%
(down 20 bps y-o-y).
Bank Credit jumped $25.6bn to $9.418 TN (week of 7/16). Bank Credit has
expanded $205bn year-to-date, or 4.0% annualized. Bank Credit posted a 52-week
rise of $775bn, or 9.0%. For the week, Securities Credit added $1.4bn. Loans
& Leases jumped $24.2bn to $6.911 TN (52-wk gain of $586bn, or 9.3%).
C&I loans gained $4.4bn, with one-year growth of 18.3%. Real Estate loans
slipped $0.4bn (up 1% year-to-date). Consumer loans increased $5.8bn, and
Securities loans rose $7.3bn. Other loans gained $7.0bn.
M2 (narrow) "money" supply was little changed at $7.698 TN (week of 7/14).
Narrow "money" has expanded $236bn year-to-date, or 5.9% annualized, with a
y-o-y rise of $428bn, or 5.9%. For the week, Currency declined $0.7bn, and
Demand & Checkable Deposits fell $9.4bn. Savings Deposits increased $8.3bn,
and Small Denominated Deposits added $0.8bn. Retail Money Funds increased
$1.2bn.
Total Money Market Fund assets (from Invest Co Inst) rose $8.8bn to $3.507 TN,
with a year-to-date increase of $394bn, or 22.7% annualized. Money Fund assets
have posted a one-year increase of $924bn (35.7%).
Asset-Backed Securities (ABS) issuance remained steady at a slow $2.5bn.
Year-to-date total US ABS issuance of $114bn (tallied by JPMorgan's Christopher
Flanagan) is running at 27% of comparable 2007. Home Equity ABS issuance of
$303 million compares with 2007's $207bn. Year-to-date CDO issuance of $14.7bn
compares to the year ago $249bn.
Total Commercial Paper outstanding declined $5.8bn this week to $1.744 TN, with
a year-to-date decline of $41.3bn. Asset-backed CP rose $4.7bn last week to
$750bn, reducing 2008's decline to $22.8bn. Over the past year, total CP has
contracted $481bn, or 21.6%, with ABCP down $440bn, or 36.9%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 7/23) increased
$5.5bn to a record $2.353 TN. "Custody holdings" were up $297bn year-to-date,
or 25% annualized, and $350bn year-over-year (17.5%). Federal Reserve Credit
declined $5.4bn to $883bn. Fed Credit has expanded $9.5bn year-to-date (1.9%
annualized) and $32.8bn y-o-y (3.9%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.384 TN y-o-y, or 26.5%, to a record $6.987 TN.
July 24 - Bloomberg (Maria Levitov): "Russia's international reserves, the
world's third largest, rose to a record $588.3 billion last week, the central
bank said. The value of the reserves increased by $10 billion in the week ... "
Global Credit Market Dislocation Watch
July 21 - Bloomberg (Caroline Salas): "A third of US fixed-income investors are
unwinding bad bets, according to a Greenwich Associates Survey. 'The market's
biggest traders are still dumping problem securities, not buying,' Tim
Sangston, a consultant at ... Greenwich Associates, wrote ... Among money
managers who trade more than $50 billion of fixed-income securities annually,
47% said they plan to unwind positions. Of the investors who said they need to
sell securities, about 30% aim to dump asset-backed securities and/or
investment-grade bonds and a quarter would like to sell mortgage- backed
securities ... A third of investors are also looking to capitalize on the
market turmoil by buying illiquid securities ... More than half of the
investors polled said they have altered or plan to change their strategies
because of the credit market rout, and of those, 60% will invest in
higher-quality securities, the survey said."
July 21 - Wall Street Journal (Justin Lahart): "With the credit crunch on Wall
Street entering its second year, a widening array of businesses are finding it
tough to get credit. And with mortgage giants Fannie Mae and Freddie Mac
roiling credit markets, individuals could soon find it harder to get a loan as
well ... Banks also are pulling back on the amount of rainy-day money they have
been giving out to corporate clients in the form of loans called
revolving-credit facilities ... Overall, the value of credit held by banks in
the second quarter shrank 1.5% from the first quarter, according to Federal
Reserve data. That was the largest three-month contraction since 1948. These
tight credit conditions are particularly worrisome because the Federal Reserve
has responded aggressively since the credit crunch emerged last July ... Credit
is the lifeblood of economic activity. If it continues to be hard to get ...
that could spell trouble for an economy teetering on the edge of recession."
July 20 - Reuters (Nick Carey): "As losses mount at American banks and the pain
of the credit crisis spreads from housing and finance to the broader economy,
many small companies complain it is increasingly difficult to obtain loans.
Tighter credit could not only help to push the United States into recession,
but prolong the downturn as ideas for new businesses get stymied once
entrepreneurs sit down with local bank managers, small business representatives
warn. 'In recent weeks we've seen banks becoming more cautious and the pace of
lending has slowed considerably,' said Weldon Gibson, a consultant at the Lamar
University Small Business Development Center in Texas. 'They are demanding
higher credit scores and want more collateral before lending.' Small businesses
are a linchpin of the US economy because they form the backbone of the
country's jobs market and are crucial for job creation."
July 25 - Bloomberg (Dawn Kopecki and Shannon D. Harrington): "Standard &
Poor's may downgrade the subordinated bonds of Fannie Mae and Freddie Mac,
surprising investors who had anticipated the securities would be supported by
any Treasury rescue plan. The potential cut would affect $19.2 billion of AA-
rated subordinated debt at Fannie Mae and Freddie Mac ... "
July 23 - Financial Times (Anousha Sakoui): " A year ago today, US-owned power
company Intergen sold $1.875bn of junk bonds - it turned out to be the last
high-yield deal to be sold in the young but seemingly flourishing European
market. No other deal has been seen since the credit crunch took hold - a worse
issuance record over that time in Europe than for risky leveraged loans or even
mortgage-backed bonds. Globally, issuance of junk-rated debt has struggled but
there have been some deals. The first half of this year saw $43bn of junk bonds
sold compared with $121bn
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