Page 2 of 3 CREDIT BUBBLE BULLETIN
Asia's savers not the culprit
Commentary and weekly watch by Doug Noland
the Dow jumped 6.8% (down 11.4%). The Transports advanced 10.5% (down 21.4%)
and the Morgan Stanley Cyclicals rose 12.9% (down 15.6%). Consumer stocks were
quite strong, with the S&P Homebuilding index up 25.0% (up 16.2%) and the
Morgan Stanley Retail index up 13.2% (up 10.2%). Technology continues to
perform well. The Nasdaq100 jumped 5.4% (up 3.3%), the Morgan Stanley High Tech
index 4.0% (up 8.4%), the Semiconductors 9.8% (up 13.1%), and the
InteractiveWeek Internet index 5.9% (up 13.0%). The broader market rallied
sharply this week. The S&P400 Mid-Caps jumped 7.4% (down 7.3%), and the
small cap Russell 2000 gained 7.2% (down 14.1%). The Utilities increased 1.5%
(down 12.0%), and the Morgan Stanley Consumer index gained 4.3% (down 8.6%).
The
Biotechs rallied 4.2% (up 0.4%). The Broker/Dealers surged 11.5% (up 3.5%), and
the Banks shot 12.0% higher (down 34.2%). Although Bullion dropped $28.50, the
HUI Gold index slipped only 0.4% (up 7.6%).
One-month Treasury bill rates ended the week at 3 bps, and three-month bills
were at 14 bps. Two-year government yields added 2 bps to 0.85%. Five year
T-note yields jumped 12 bps to 1.72%. Ten-year yields rose 12 bps to 2.76%. The
long-bond saw yields decline 4 bps to 3.67%. The implied yield on 3-month
December '09 Eurodollars dropped 8 bps to 1.305%. Benchmark Fannie MBS yields
were unchanged at 3.94%. The spread between benchmark MBS and 10-year T-notes
narrowed 12 to 118 bps. Agency 10-yr debt spreads widened 4 to 84 bps. The
2-year dollar swap spread declined 8.75 to 55 bps; the 10-year dollar swap
spread declined 13 to 18.75 bps, and the 30-year swap spread declined 3 to
negative 31 bps. Corporate bond spreads were narrower. An index of investment
grade bond spreads narrowed 14 to a one-month low 248 bps, and an index of junk
spreads narrowed 12 to 1,233 bps. GE Capital Credit default swaps were little
changed this week.
It was a another large week for corporate debt sales. Investment grade issuance
included Citigroup $6.0 billion, Wells Fargo $3.5 billion, Time Warner $3.0
billion, Verizon $2.75 billion, Illinois Toolworks $1.5 billion, US Bancorp
$1.1 billion, Berkshire Hathaway $750 million, Con Edison $750 million, Bank of
New York $600 million, Atmos Energy $450 million, Staples $500 million, Cornell
University $500 million, Metlife $400 million, Praxair $300 million, Emory
University $250 million, Northwestern Corp $250 million, and Idaho Power $100
million.
Junk issuers included Newell Rubbermaid $300 million, Texas-New Mexico Power
$265 million, Sunoco $250 million, and Kansas City Southern $200 million.
And, what do you know, a convert deal priced this week: Amkor Tech $240
million.
International debt issues last week included Lloyds Bank $6.25 billion,
International Bank of Reconstruction and Development $6.0 billion, ANZ National
$1.0 billion, Peru $1.0 billion, and Bacardi $500 million.
UK 10-year gilt yields surged 26 bps to 3.28%, and German bund yields jumped 11
bps to 3.08%. The German DAX equities index increased 3.3% (down 12.6%).
Japanese 10-year "JGB" yields rose 7 bps to 1.32%. The Nikkei 225 surged 8.6%
(down 2.6%). The emerging market rally continued. Brazil's benchmark dollar
bond yields were little changed at 6.51%. Brazil's Bovespa equities index
gained 4.3% (up 11.3% y-t-d). The Mexican Bolsa jumped 4.9% (down 9.2% y-t-d).
Mexico's 10-year $ yields declined 3 bps to 6.19%. Russia's RTS equities index
increased 3.5% (up 14.1%). India's Sensex equities index rallied 12.1% (up
4.2%). China's Shanghai Exchange gained another 4.1% (up 30.4%).
Freddie Mac 30-year fixed mortgage rates dropped 13 bps to a record low 4.85%
(down 100bps y-o-y). Fifteen-year fixed rates declined 3 bps to 4.58% (down
76bps y-o-y). One-year ARMs fell 6 bps to 4.85% (down 39bps y-o-y). Bankrate's
survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 5 bps
last week to 6.42% (down 63bps y-o-y).
Federal Reserve Credit expanded $9.6 billion last week to $2.051 trillion. Fed
Credit has dropped $196 billion y-t-d, although it expanded $1.163 trillion
over the past 52 weeks. Elsewhere, Fed Foreign Holdings of Treasury, Agency
Debt last week (ended 3/25) rose $4.5 billion to $2.595 trillion. "Custody
holdings" have been expanding at a 13.5% rate y-t-d, and were up $410 billion
over the past year, or 18.8%.
Bank Credit sank $91.1 billion to $9.714 trillion (week of 3/18). Bank Credit
was up $149 billion year-over-year, or 1.6%. Bank Credit increased $322 billion
over the past 28 weeks. For the week, Securities Credit gained $4.9 billion.
Loans & Leases dropped $96 billion to $7.040 trillion (52-wk gain of $84
billion, or 1.2%). C&I loans declined $15.4 billion, with one-year growth
of 3.8%. Real Estate loans dropped $52.4 billion (up 3.5% y-o-y). Consumer
loans fell $11.4 billion, and Securities loans dipped $1.7 billion. Other loans
declined $15.1 billion.
M2 (narrow) "money" supply surged $33.3 billion to a record $8.376 trillion
(week of 3/16). Narrow "money" has now inflated at a 17.4% rate over the past
26 weeks and $773 billion over the past year, or 10.2%. For the week, Currency
added $1.4 billion, while Demand & Checkable Deposits dropped $12.9
billion. Savings Deposits surged $36.8 billion (6-wk gain of $139 billion),
while Small Denominated Deposits slipped $1.2 billion. Retail Money Funds
gained $9.1 billion.
Total Money Market Fund assets (from Invest Co Inst) declined $7.1 billion to
$3.856 trillion. The 52-wk expansion was reduced to $351 billion, or 10.0%.
Money Funds have expanded at a 2.9% rate y-t-d.
Asset-Backed Securities (ABS) issuance slowed in the week. Year-to-date total
US ABS issuance of $17 billion (tallied by JPMorgan's Christopher Flanagan) is
a fraction of the $45 billion for comparable 2008. There has been no home
equity ABS issuance in months.
Total Commercial Paper outstanding jumped $14.8 billion in the week to $1.491
trillion. CP has declined $190 billion y-t-d (49% annualized) and $342 billion
over the past year (18.6%). Asset-backed CP added $2.2 billion in the week to
$702 billion, with a 52-wk drop of $101 billion (12.5%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $194 billion y-o-y, or 3.0%, to $6.646 trillion. Reserves
have declined $300 billion over the past 23 weeks.
Global Credit Market Dislocation Watch
March 25 - Bloomberg (Li Yanping): "China's leaders may press at the Group of
20 summit for specific steps to protect its more than $1 trillion of dollar
assets as US fiscal policies risk sparking a 'currency war,' a senior Chinese
researcher said. The dollar weakened after the Federal Reserve said March 18 it
would buy as much as $300 billion of Treasuries and the US this week outlined
plans to buy as much as $1 trillion of illiquid bank assets. US purchases of
Treasuries are 'irresponsible' because they may weaken the dollar, Li
Xiangyang, of the government- backed Chinese Academy of Social Sciences, told a
forum ... 'Chinese leaders are likely to articulate their concern to their US
counterparts strongly and ask for specific measures.'"
March 25 - MarketWatch (Chris Oliver): "China's calls for a new international
reserve currency to replace the US dollar are more than mere bluster and could
likely lead the debate over the future of the global foreign-exchange system,
analysts say. 'By proposing such a sweeping reform, China is demonstrating its
growing influence in reshaping the global monetary system, and is now on
offensive in the debate of who is responsible for the global imbalances,'
Deutsche Bank's chief economist for Greater China Jun Ma said ... The comments
by People's Bank of China Gov. Zhou Xiaochuan are setting a framework for talks
on how to resolve the huge trade imbalances between China and the US , analysts
said. In the past, China has been blamed for its large trade surplus by
officials in the US and elsewhere, who see the yuan as undervalued. 'China has
effectively set the agenda for the G20 leaders' summit,' wrote SocGen
economists ... referring to next week's meeting of finance chiefs from the
Group of 20 leading economies in London."
March 27 - Bloomberg (Tony Czuczka): "Swedish Finance Minister Anders Borg said
that the rise in government borrowing during the financial crisis poses a
threat to economic stability and laid the blame at the door of the US and UK
Borrowing requirements are reaching levels that are putting economies "in
jeopardy," Borg told an audience at the German Finance Ministry in Berlin
today. He singled out the US and UK, which he said are shouldering 'humungous
deficits.'"
March 24 - Bloomberg (Tony Czuczka): "President Barack Obama urged fellow Group
of 20 leaders to provide a 'robust and sustained' fiscal stimulus, saying that
'much more' action is needed to fight the global recession. In an article
published today in newspapers including Germany's Die Welt and the Paris-based
International Herald Tribune, Obama also urged increased funding for
international lenders and a 'common framework' of steps to restore the world
economy's flow of credit."
March 23 - Bloomberg (Rebecca Christie and Robert Schmidt): "The Obama
administration unveiled its plan to remove toxic assets from the books of the
nation's banks, betting that it can revive the US financial system without
resorting to outright nationalization. The plan is aimed at financing as much
as $1 trillion in purchases of illiquid real-estate assets, using $75 billion
to $100 billion of the Treasury's remaining bank-rescue funds. The
Public-Private Investment Program will also rely on Federal Reserve financing
and Federal Deposit Insurance Corp. debt guarantees ... "
March 25 - Wall Street Journal (Sudeep Reddy and Michael R. Crittenden): "The
Treasury Department's program to deal with banks' troubled assets leaves as
little as $82 billion in the $700 billion bailout fund approved last fall,
putting the US government's financial-rescue squad in a bind. The remaining
cash will be needed to cover aid to troubled auto makers, potentially tens of
billions of dollars to recapitalize major financial institutions, and any other
unwelcome surprises. But a sharp backlash against bailouts means Congress is
unlikely to mandate more funds anytime soon."
March 24 - Bloomberg (Ari Levy and Daniel Taub): "US banks, battered by record
losses from the worst housing slump since the Great Depression, now must
weather increasing loan delinquencies from owners of skyscrapers and shopping
malls. The country's 10 biggest banks have $327.6 billion in commercial
mortgages, which face a wave of defaults as office vacancies grow and retailers
and casinos go bankrupt."
March 26 - Bloomberg (Christopher Swann): "The World Bank completed its
largest-ever bond issue, raising $6 billion to provide financing for developing
countries suffering from the economic crisis."
March 25 - Wall Street Journal (Peter Lattman, Jenny Strasburg and Deborah
Solomon): "Stocks surged world-wide after the White House formally unveiled its
plan to clean banks' balance sheets, with an emphasis on luring private
investors to buy up to $1 trillion in toxic assets that are choking the flow of
credit. The Dow Jones Industrial Average soared 6.8%, or 497.48 points, to
7,775.86, in its biggest gain since late October. Bank stocks rose sharply on
hopes the plan will rid them of much of the soured debt and securities weighing
on their balance sheets. Citigroup Inc. shares were up about 20% and Bank of
America Corp. shares rose 26%."
March 25 - Bloomberg (Laura Cochrane): "Emerging-market borrowing costs are
'unrealistic' and will increase to near record highs this year as governments
and companies seek to make $760 billion of debt repayments and global defaults
rise, according to ING Groep NV. The extra yield investors demand to own
emerging-market sovereign and quasi-sovereign bonds, which dropped to a four-
month low of 6.69% today, may climb to above 10%, said David Spegel, global
head of emerging-market strategy at ING ... "
Currency Watch
March 23 - MarketWatch (Polya Lesova): "Federal Reserve Board Chairman Ben
Bernanke and Treasury Secretary Timothy Geithner flatly rejected on Tuesday a
call from a senior Chinese official to drop the dollar as the world's key
reserve currency. Zhou Xiaochuan, head of the People's Bank of China, proposed
the
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