Page 2 of 5 CREDIT BUBBLE BULLETIN Debt trap
Commentary and weekly watch by Doug Noland
spreads declined 6 to 114 bps. The 2-year dollar swap spread declined 13.75 to
107.50, and the 10-year dollar swap spread declined 6.5 to 41.75. Corporate
bond spreads were mixed. An index of investment grade bond spreads narrowed 2
to 221 bps, while an index of junk bond spreads widened 20 to 949 bps.
Investment-grade debt issuance included Altria $6.0bn (600bp over), Virginia
E&P $700 million, GATX $200 million, and Atlantic City Electric $250
million.
I saw no junk or convert issues.
International issuance this week included BP Capital $3.0bn.
German 10-year bund yields fell 12 bps to 3.675%. The German
DAX equities index declined 1.0% (down 38.8% y-t-d). Japanese 10-year "JGB"
yields increased 4 bps to 1.51%. The Nikkei 225 dropped 4.9% (down 43.9%
y-t-d). Emerging markets were mixed to higher. Brazil's benchmark dollar bond
yields dropped 32 bps to 8.13%. Brazil's Bovespa equities index declined 1.6%
(down 42.6% y-t-d). The Mexican Bolsa dropped 2.8% (down 32.7% y-t-d). Mexico's
10-year $ yields were little changed at 7.59%. Russia's RTS equities index
added 0.3% (down 66.8% y-t-d). India's Sensex equities index rallied 1.8%, with
y-t-d losses reduced to 50.9%. China's Shanghai Exchange incrased 1.1%, with
y-t-d losses of 66.8%.
Freddie Mac 30-year fixed mortgage rates dropped 26 bps to 6.20% (down 4bps
y-o-y). Fifteen-year fixed rates dropped 31 bps to 5.88% (down 2bps y-o-y).
One-year ARMs fell 13 bps to 5.25% (down 25 bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 16 bps this
week to 7.49% (up 94bps y-o-y).
Bank Credit dropped $64.5bn to $10.011 TN (week of 10/29). Bank Credit has
expanded $798bn y-t-d, or 10.2% annualized. Bank Credit posted a 52-week rise
of $893bn, or 9.8%. For the week, Securities Credit fell $35.7bn. Loans &
Leases declined $28.7bn to $7.244 TN (52-wk gain of $550bn, or 8.2%). C&I
loans decreased $6.1bn, with y-t-d growth of 13.3%. Real Estate loans gained
$6.5bn (up 6.7% y-t-d). Consumer loans added $0.9bn, while Securities loans
dropped $31.8bn. Other loans increased $1.7bn.
M2 (narrow) "money" supply dropped $48.2bn to $7.877 TN (week of 10/27). Narrow
"money" has expanded $415bn y-t-d, or 6.7% annualized, with a y-o-y rise of
$471bn, or 6.4%. For the week, Currency rose $4.3bn, and Demand & Checkable
Deposits jumped $28.3bn. Savings Deposits sank $88.5bn, while Small Denominated
Deposits gained $10.1bn. Retail Money Funds slipped $2.4bn.
Total Money Market Fund assets (from Invest Co Inst) jumped $70bn to $3.608 TN,
with a y-t-d expansion of $494bn, or 18.8% annualized. Money Fund assets have
posted a one-year increase of $607bn (20.2%).
The Asset-Backed Securities (ABS) market remains pretty much closed down.
Year-to-date total US ABS issuance of $129bn (tallied by JPMorgan's Christopher
Flanagan) is running at 25% of comparable 2007. Home Equity ABS issuance of
$351 million compares with 2007's $232bn. Year-to-date CDO issuance of $30bn
compares to the year ago $300bn.
Total Commercial Paper outstanding rose another $50.5bn this week to a
one-month high $1.600 TN, with CP down $185bn y-t-d. Asset-backed CP increased
$11.1bn, with 2008 posting a decline of $40.5bn. Over the past year, total CP
has contracted $267bn, or 14.3%.
Federal Reserve Credit surpassed $1.0 Trillion for the first time in September
and rose above $2.0 Trillion last week. For the week, Fed Credit surged $183bn
to a record $2.056 TN, with a historic 8-wk increase of $1.168 Trillion. Fed
Credit has expanded $1.82 TN y-t-d (156% annualized) and $1.191 Trillion y-o-y
(138%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 11/5)
increased $8.1bn to $2.494 TN. "Custody holdings" were up $438bn y-t-d, or
24.6% annualized, and $462bn y-o-y (22.7%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - have dropped a notable $145bn over the past three weeks. During
the past year reserves were up $864bn, or 14.5%, to $6.801 TN.
Global Credit Market Dislocation Watch
November 5 - Wall Street Journal (Kelly Evans): "Banks continue to tighten
lending terms for the nation's consumers and businesses ... The Federal
Reserve's latest survey of banks' senior loan officers showed that a large
majority of the 76 US and foreign-based respondents clamped down on lending in
the past three months ... Also, separate reports Monday showed manufacturing
activity slowed, and construction spending fell ... Some 95% of banks in the US
said they tightened price terms on commercial and industrial loans to large and
midsize firms ... A total of 85% tightened lending standards, compared with 60%
in the previous three-month period ... Roughly 60% of US banks tightened
lending standards on credit-card loans and other types of consumer loans, while
about half said they raised the minimum required credit scores for such loans."
November 5 - MarketNews International (Steven K. Beckner): "Dallas Federal
Reserve Bank President Richard Fisher said Tuesday he 'would not be surprised'
if the Fed's assets balloon to $3 trillion by the end of year. Fisher ...
suggested inflation has ceased to be an issue for now because the economy is
'geared to the downside with a kind of turbulent ferocity.' He said it 'will
take time' before confidence is reestablished."
November 7 - Washington Post (David Cho, Peter Whoriskey and Neil Irwin): "The
federal government is preparing to take tens of billions of dollars in
ownership stakes in an array of companies outside the banking sector,
dramatically widening the scope of the Treasury Department's rescue effort
beyond the $250 billion set aside for traditional financial firms, government
and industry officials said. Treasury officials are finalizing the new program,
which could ultimately involve hundreds of billions of the $700 billion rescue
package, though the initiative is unlikely to be announced until the end of
next week at the earliest."
November 6 - Dow Jones (Siobhan Hughes and Henry Pulizzi): "The White House ...
told automakers and other companies to submit applications for government
loans, one day after the Bush administration took steps to get the $25 billion
program running ahead of schedule. 'We encourage the automakers and other
eligible companies to file their applications to obtain loans for qualifying
projects so they can produce more fuel-efficient vehicles which consumers are
demanding,' White House spokesman Tony Fratto said."
November 7 - Bloomberg (Jeff Green and Mike Ramsey): "General Motors Corp.,
seeking federal aid to avoid collapse, said it may not have enough cash to keep
operating this year and will fall 'significantly short' of the amount needed by
the end of June unless the auto market improves or it raises more capital. The
largest US automaker reported a $4.2 billion third-quarter operating loss ... "
November 7 - Bloomberg (Bill Koenig): "Ford Motor Co., with US sales shredded
by the worst financial crisis since the Great Depression, posted a
third-quarter operating loss of $2.98 billion and said it used up $7.7 billion
in cash."
November 7 - Bloomberg (John Hughes): "General Motors Corp., Ford Motor Co. and
Chrysler LLC, strapped for cash as sales plunge, are seeking $50 billion in
federal loans to help them weather the worst auto market in 25 years, a person
familiar with the matter said. The package would be $25 billion for health-care
spending and $25 billion for general liquidity that could be delivered in
different ways, including short-term borrowing from the Federal Reserve ... "
November 6 - Wall Street Journal (Prabha Natarajan and Robin Sidel): "A key
part of the bond market that is essential for making credit-card, auto,
education and mortgage loans still shows little sign of improvement - a
development that could have repercussions for both banks and consumers. New
data on this 'asset securitization' market from ... Dealogic reveal that
issuers sold just one $500 million securitization deal for the entire month of
October. That compares with $50.7 billion worth of deals made one year earlier,
and a fraction of the overall $2.5 trillion market for buying and repackaging
consumer-based loans."
November 4 - Wall Street Journal (Kelly K. Spors, Raymund Flandez and Phred
Dvorak): "When entrepreneurs can't get conventional loans, they traditionally
turn to loans backed by the Small Business Administration. But in recent months
- as many banks turned away businesses and slashed credit lines - SBA lending
also has dried up substantially. The retrenchment has become especially
pronounced in the past couple of weeks ... The SBA reported last week that loan
volumes made under its flagship 7(a) loan program fell 30% in the fiscal year
ended Sept. 30. And in October, overall SBA loan volumes were 50% lower than in
October 2007 ... "
November 3 - Bloomberg (Joe Carroll and Mario Parker): "VeraSun Energy Corp.
and US ethanol makers backed by Bill Gates and Vinod Khosla are failing after
wrong-way bets on corn prices overwhelmed $20 billion in federal aid and
government-guaranteed demand for the fuel additive. VeraSun, the second-largest
US ethanol producer, was the latest in a string of distillers stung by
imploding hedges when the ... company filed for Chapter 11 bankruptcy
protection on Oct. 31. Biofuel Energy ... and at least six other distillers
have shut down or curtailed operations because of volatile corn prices and
narrowing ethanol margins ... Investors from Wall Street to Silicon Valley took
a piece of the action after Congress and the White House ordered oil companies
three years ago to almost double ethanol use by 2012."
November 7 - Bloomberg (Ari Levy and David Mildenberg): "GMAC LLC may leave
thousands of individuals on the hook for about $15 billion of junk-rated debt
unless the auto and home lender finds a way to pay its bills. GMAC, the largest
lender to car dealers of General Motors Corp., issued more than $25 billion of
debt called SmartNotes over the past decade to retail investors. While GMAC has
paid off the debts as they matured, five straight unprofitable quarters raised
doubt about GMAC's survival, and SmartNotes due in July 2020 have lost about
two-thirds of their value."
November 7 - Wall Street Journal (Annelena Lobb): "Dividends are another
investor mainstay weakening in this market, along with 401(k)s, variable
annuities, money-market funds and other once-reliable vehicles. This year,
dividend payouts have taken a hit ... Thirty-six companies listed on S&P's
500-stock index have cut or suspended dividends 46 times in 2008, sucking some
$33.3 billion from investors' pockets ... From that sum, $30.8 billion came
from financial companies, representing 37 individual actions."
November 5 - Bloomberg (Christian Vits): "Banks deposited a record amount of
cash with the European Central Bank overnight,
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
