Page 1 of 4 CREDIT BUBBLE BULLETIN Temporarily immune from reality
Market watch by Doug Noland
For the week, the Dow shed 0.3% (down 12.3% y-t-d) and the S&P500 declined
0.5% (down 12%). The Transports fell 1.9% (up 10.6%), while the Utilities rose
2.3% (down 11.3%). The Morgan Stanley Cyclical index dropped 2.2% (down 12.5%),
and the Morgan Stanley Consumer index declined 1.6% (down 5.6%). The small cap
Russell 2000 fell 2.1% (down 3.7%), and the S&P400 Mid-caps declined 0.8%
(down 5.0%). The NASDAQ100 declined 1.3% (down 7.4%), and the Morgan Stanley
High Tech index fell 1.9% (down 7.6%). The Semiconductors sank 2.7% (down
10.3%). The Street.com Internet Index lost 1.0% (down 4.6%), and the NASDAQ
Telecommunications index dipped 0.8% (down 1.0%). The Biotechs were hit for
3.5%, reducing y-t-d gains to 8.3%. The Broker/Dealers sank 3.2% (down 29.8%),
and the
Banks lost 3.2% (down 27.7%). With Bullion rallying $37, the HUI Gold index
jumped 8.7% (down 16.3%).
One-month Treasury bill rates fell 6 bps this week to 1.69%, and 3-month yields
sank 17 bps to 1.70%. Two-year government yields added one basis point to
2.40%. Five-year T-note yields increased 3.5 bps to 3.135%, and 10-year yields
rose 3 bps to 3.87%. Long-bond yields were unchanged at 4.465%. The 2yr/10yr
spread increased 2 bps to 147 bps. The implied yield on 3-month December '09
Eurodollars rose 3.5 bps to 3.69%. Benchmark Fannie MBS yields declined 2 bps
to 5.94%. The spread between benchmark MBS and 10-year Treasuries narrowed 5 to
207 bps. The spread on Fannie's 5% 2017 note narrowed 15 bps to 66 bps, and the
spread on Freddie's 5% 2017 note also narrowed 15 bps to 66 bps. The 10-year
dollar swap spread declined 2.25 to 72. Corporate bond spreads were mostly
wider. An index of investment grade bond spreads widened 7 to 141 bps, while an
index of junk bond spreads declined to 567 bps.
August 22 - Bloomberg (Gabrielle Coppola): "US corporate bond sales slowed to
the lowest level in seven weeks as the extra yield investors demand to own
investment-grade bonds rather than government debt reached record highs.
Borrowers raised $2.82 billion, compared with $16 billion last week and $28
billion in the same time last year."
Investment grade issuance this week included 3M $850 million, Bank of New York
$750 million, and Duke Energy $500 million.
I saw no junk, convertible, or international dollar issuance this week.
German 10-year bund yields rose 5 bps to 4.22%. The German DAX equities index
fell 1.6% (down 21.4% y-t-d). Japanese 10-year "JGB" yields declined 1.5 bps to
1.44%. The Nikkei 225 sank 2.7% (down 17.3% y-t-d). Emerging markets were
mostly on the defensive. Brazil's benchmark dollar bond yields increased 1 bps
to 5.93%. Brazil's Bovespa equities index rallied 3.0% (down 12.6% y-t-d). The
Mexican Bolsa fell 1.7% (down 9.0% y-t-d). Mexico's 10-year $ yields added one
basis point to 5.67%. Russia's RTS equities index was smacked for 4.7% (down
25.7% y-t-d). India's Sensex equities index declined 2.2%, boosting y-t-d
losses to 29%. China's Shanghai Exchange index dropped 1.9%, with 2008 losses
rising to 54.3%.
Freddie Mac 30-year fixed mortgage rates declined 5 bps to 6.47% (up 2 bps
y-o-y). Fifteen-year fixed rates fell 7 bps to 6.00% (down 12bps y-o-y), while
one-year ARMs rose 11 bps to 5.29% (down 55bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 13 bps this
week to 7.40%.
Bank Credit jumped $39.7bn to $9.431 TN (week of 8/13). Bank Credit has
expanded $218bn y-t-d, or 3.7% annualized. Bank Credit posted a 52-week rise of
$703bn, or 8.1%. For the week, Securities Credit surged $29.3bn. Loans &
Leases gained $10.4bn to $6.937 TN (52-wk gain of $533bn, or 8.3%). C&I
loans declined $2.0bn, with y-t-d growth of 7.9%. Real Estate loans advanced
$9.3bn (up 2.1% y-t-d). Consumer loans slipped $1.7bn, while Securities loans
gained $10.9bn. Other loans dropped $6.1bn.
M2 (narrow) "money" supply expanded $7.0bn to $7.728 TN (week of 8/11). Narrow
"money" has expanded $265bn y-t-d, or 5.8% annualized, with a y-o-y rise of
$434bn, or 5.9%. For the week, Currency dipped $0.3bn, and Demand &
Checkable Deposits sank $24.4bn. Savings Deposits jumped $27.8bn, and Small
Denominated Deposits increased $6.8bn. Retail Money Funds declined $2.7bn.
Total Money Market Fund assets (from Invest Co Inst) declined $1.5bn to $3.573
TN, with a y-t-d increase of $460bn, or 23.3% annualized. Money Fund assets
have posted a one-year increase of $796bn (28.7%).
There was little Asset-Backed Securities (ABS) issuance this week and no CDO
issuance. Year-to-date total US ABS issuance of $120bn (tallied by JPMorgan's
Christopher Flanagan) is running at 26% of comparable 2007. Home Equity ABS
issuance of $303 million compares with 2007's $216bn. Year-to-date CDO issuance
of $18bn compares to the year ago $266bn.
Total Commercial Paper outstanding jumped $40.5bn this week to $1.787 TN,
pushing y-t-d totals to a $1.8bn gain. Asset-backed CP rose $24.6bn last week
to $749bn, reducing 2008's decline to $23.7bn (4.7% annualized). Over the past
year, total CP has contracted $255bn, or 12.5%, with ABCP down $320bn, or
29.9%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 8/20) increased
$10.9bn to $2.406 TN. "Custody holdings" were up $349bn y-t-d, or 26%
annualized, and $419bn y-o-y (21.1%). Federal Reserve Credit expanded $4.6bn to
$888bn. Fed Credit has expanded $14.1bn y-t-d (2.5% annualized) and $36.0bn
y-o-y (4.2%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.287 TN y-o-y, or 22.6%, to $6.973 TN.
Global Credit Market Dislocation Watch
August 22 - Bloomberg (Kevin Hamlin): "A failure of US mortgage finance
companies Fannie Mae and Freddie Mac could be a catastrophe for the global
financial system, said Yu Yongding, a former adviser to China's central bank.
'If the US government allows Fannie and Freddie to fail and international
investors are not compensated adequately, the consequences will be
catastrophic,' Yu said... 'If it is not the end of the world, it is the end of
the current international financial system.'"
August 19 - Bloomberg (Jody Shenn): "Freddie Mac, the second-largest US
mortgage-finance company, sold five-year reference notes at its highest yields
over benchmarks in at least 10 years as demand from Asian investors fell. The
$3 billion of debt... was priced to yield 4.172%, or 113 bps more than US
Treasuries of similar maturity... The... company last sold five-year notes in
May at a yield of 3.751%, a spread of 69 bps."
August 20 - Bloomberg (Dawn Kopecki): "Fannie Mae and Freddie Mac's success in
repaying $223 billion of bonds due by the end of the quarter may determine
whether they can avoid a federal bailout. Fannie... has about $120 billion of
debt maturing through Sept. 30, while... Freddie has $103 billion... Rolling
over the debt 'is the single most important factor to their ability to remain
liquid,' said Moshe Orenbuch, an analyst at Credit Suisse... 'So far, they've
been able to do that.' Investors in Asia, the biggest foreign owner of Fannie's
$3 trillion of bonds, are reducing their share of purchases, potentially
increasing the need for Paulson to make good on his pledge to backstop the
companies. 'This whole backstop mechanism was set up so the actual need for it
could be avoided,' said Mahesh Swaminathan, a mortgage strategist for Credit
Suisse... 'The market is testing the Treasury's resolve.'"
August 19 - Financial Times (Paul J Davies): "The gloomier outlook for
corporate debt in the US and Europe is turning a spotlight on another banking
business that exploded during the credit boom, growing from next to nothing
into a trillion-dollar industry in little more than four years. Repackaging
credit derivatives to create leveraged investments was a tiny business in the
early years of this decade, but between late 2003 and the middle of last year
analysts estimate that between $1,000bn and $1,500bn worth of these deals were
sold. The products in question are synthetic collateralised debt obligations.
Now, after a year of highly volatile credit markets and with rating
agencies
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