Page 2 of 5 CREDIT BUBBLE BULLETIN Only cure for a bubble
Commentary and weekly watch by Doug Noland
8.1% (down 47.7%). The Semiconductors were hammered for 9.8% (down 50.6%). The
Street.com Internet Index dropped 6.9% (down 40.3%), and the NASDAQ
Telecommunications index declined 8.7% (down 45.2%). The Biotechs fell 6.4%
(down 21.8%). The Broker/Dealers sank 14.1% (down 65.3%), and the Banks fell
9.9% (down 45.4%). Although Bullion recovered $5.60, the HUI Gold index was hit
for 7.3% (down 54.5%).
One-month Treasury bill rates ended the week at 0.05% and three-month yields at
0.13%. Two-year government yields declined 12 bps to 1.21%. Five-year T-note
yields sank 25 bps
this week to 2.315%, and 10-year yields declined 6 bps to 3.72%. Long-bond
yields fell 6.5 bps to 4.215%. The implied yield on 3-month December '09
Eurodollars dropped 9.5 bps to 2.345%. Benchmark Fannie MBS yields dipped only
one basis point to 5.54%. The spread between benchmark MBS and 10-year T-notes
widened 6 to 181 bps. Agency 10-yr debt spreads surged a notable 35 to a record
149 bps. The 2-year dollar swap spread increased 7 to 114.5 bps, while the
10-year dollar swap spread declined 8 to 33.75. Corporate bond spreads were
mostly wider. An index of investment grade bond spreads increased 10 to 198
bps, and an index of junk bond spreads widened 25 to 989 bps.
Investment-grade debt issuance included Time Warner $2.0bn, AT&T $1.5bn,
Philip Morris $1.25bn, Pacific Gas & Electric $1.2bn, Duke Energy $900
million, Georgia Power $400 million, Cleveland Electric $300 million,
Southwestern Public Service $250 million, and Alabama Power $250 million.
I saw no junk or convert issues.
International issuance this week included Diageo $1.5bn and BAT Finance $1.0bn.
November 12 - Bloomberg (Denis Maternovsky and Bradley Cook): "The cost of
protecting against a default by Russia soared after the central bank increased
the ruble's trading band and lifted its benchmark interest rate to stem record
capital outflows. Credit-default swaps on Russian government bonds jumped to
7.17% of the amount insured from 6.14% yesterday ... "
German 10-year bund yields fell 7.5 bps to 3.60%. The German DAX equities index
dropped 4.6% (down 41.6% y-t-d). Japanese 10-year "JGB" yields dipped 2 bps to
1.49%. The Nikkei 225 declined 1.4% (down 44.7% y-t-d). Emerging markets were
mostly lower. Brazil's benchmark dollar bond yields were little changed at
8.14%. Brazil's Bovespa equities index fell 2.4% (down 44% y-t-d). The Mexican
Bolsa declined 1.5% (down 33.8% y-t-d). Mexico's 10-year $ yields rose 3 bps to
7.62%. Russia's RTS equities index sank 15% (down 71.9% y-t-d). India's Sensex
equities index droped 3.6%, with y-t-d losses boosted to 53.7%. China's
Shanghai Exchange rallied 13.7%, reducing y-t-d losses of 62.2%.
Freddie Mac 30-year fixed mortgage rates declined 6 bps to 6.14% (down 10bps
y-o-y). Fifteen-year fixed rates fell 7 bps to 5.81% (down 7bps y-o-y).
One-year ARMs rose 8 bps to 5.33% (down 17bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates 3 bps this week to
7.52% (up 94bps y-o-y).
Bank Credit dropped $121bn to $9.886 TN (week of 11/5). Bank Credit has
expanded $673bn y-t-d, or 8.4% annualized. Bank Credit posted a 52-week rise of
$715bn, or 7.8%. For the week, Securities Credit dropped $53.7bn. Loans &
Leases sank $67.3bn to $7.173 TN (52-wk gain of $470bn, or7.0%). C&I loans
declined $6.8bn, with y-t-d growth of 12.4%. Real Estate loans dropped $21bn
(up 5.7% y-t-d). Consumer loans declined $3.6bn, and Securities loans fell
$15.8bn. Other loans fell $20bn.
M2 (narrow) "money" supply was little changed at $7.878 TN (week of 11/3).
Narrow "money" has expanded $415bn y-t-d, or 6.6% annualized, with a y-o-y rise
of $487bn, or 6.6%. For the week, Currency increased $2.7bn, and Demand &
Checkable Deposits jumped $41.2bn. Savings Deposits dropped $39.1bn, while
Small Denominated Deposits rose $9.9bn. Retail Money Funds fell $14.5bn.
Total Money Market Fund assets (from Invest Co Inst) jumped $29.7bn to $3.637
TN, with a y-t-d expansion of $524bn, or 19.5% annualized. Money Fund assets
have posted a one-year increase of $613bn (20.3%).
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 $31bn
compares to the year ago $303bn.
Total Commercial Paper outstanding added $2.9bn this week to $1.603 TN, with CP
down $182bn y-t-d. Asset-backed CP rose $9.2bn, with 2008 posting a decline of
$31.3bn. Over the past year, total CP has contracted $259bn, or 13.9%.
Federal Reserve Credit jumped $142bn to a record $2.198 TN, with a historic
9-wk increase of $1.310 Trillion. Fed Credit has expanded $1.325 TN y-t-d (171%
annualized) and $1.332 Trillion y-o-y (154%). Fed Foreign Holdings of Treasury,
Agency Debt last week (ended 11/12) rose $13.7bn to $2.508 TN. "Custody
holdings" were up $452bn y-t-d, or 24.8% annualized, and $479bn y-o-y (23.6%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - have dropped a notable $180bn over the past four weeks. During the
past year reserves were up $808bn, or 13.6%, to $6.768 TN.
Global Credit Market Dislocation Watch
November 11 - Wall Street Journal (Deborah Solomon, James R. Hagerty and
Michael Crittenden): "The US government's financial-system rescue plans are
coming under pressure as a growing array of distressed companies signal the
need for assistance. On Monday, mortgage giant Fannie Mae said it is losing
money so rapidly it may need a cash infusion from the Treasury Department by
year's end. The funds would come from a special $100 billion pool Treasury set
aside back in September to aid the company. Fannie Mae had a loss of $29
billion for the third quarter. In another sign of the stress on
financial-services companies, American Express Co. won swift approval from the
Federal Reserve to become a bank-holding company ... "
November 12 - Bloomberg (John Brinsley and Robert Schmidt): "US Treasury
Secretary Henry Paulson plans to use the second half of the $700 billion
financial rescue program to help relieve pressures on consumer credit,
scrapping an effort to buy devalued mortgage assets. 'Illiquidity in this
sector is raising the cost and reducing the availability of car loans, student
loans and credit cards,' Paulson said ... 'This is creating a heavy burden on
the American people and reducing the number of jobs in our economy.'"
November 10 - Bloomberg (Dawn Kopecki): "Fannie Mae may need more than the $100
billion in funding pledged by the US Treasury to stay afloat after reporting a
record $29 billion loss and confronting more difficulty in issuing and
refinancing debt. 'This commitment may not be sufficient to keep us in solvent
condition or from being placed into receivership,' if there are further
'substantial' losses or if the company is unable to sell unsecured debt ...
Fannie said ... Fannie said it has a limited ability to issue debt maturing
past one year, citing market conditions, the lack of an explicit federal
guarantee and competition from government-insured bank bonds. Fannie, which
along with Freddie Mac was seized by regulators on Sept. 6, slashed the value
of its assets by at least $21.4 billion for the third quarter and increased
credit loss reserves by 75% to $15.6 billion."
November 14 - Bloomberg (Dawn Kopecki): "Freddie Mac, seized by the government
two months ago, asked the Treasury for $13.8 billion after a record quarterly
loss caused its net worth to fall
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