Page 2 of 3 CREDIT BUBBLE BULLETIN No conundrum, again
Commentary and weekly watch by Doug Noland
One-month Treasury bill rates ended the week at 8 bps, and three-month bills
closed at 18 bps. Two-year government yields declined about a basis point to
1.18%. Five year T-note yields fell 6 bps to 2.74%. Ten-year yields declined 4
bps to 3.79%. The long-bond saw yields end the week up one basis point to
4.64%. The implied yield on 3-month December '09 Eurodollars sank 25.5 bps to
1.11%. Benchmark Fannie MBS yields were unchanged at 4.90%. The spread between
benchmark MBS and 10-year T-notes widened 4 bps to 111 bps. Agency 10-yr debt
spreads narrowed 12 to 20 bps. The 2-year dollar swap spread declined 7 to 42
bps; the 10-year dollar swap spread declined 10.25 to 27.75 bps; and the
30-year swap spread declined 10.5 to negative 24.25 bps. Corporate bond spreads
were mixed to narrower. An index of
investment grade bond spreads was unchanged at 172 bps, while an index of junk
spreads narrowed another 28 to 846 bps.
Corporate debt issuance was about half of last week's blistering $39 billion
(according to Bloomberg). Investment grade issuers included Citigroup $3.0
billion, Dell $1.0 billion, Anadarko $900 million, International Game
Technology $500 million, Fortune Brands $500 million, Pacific Gas &
Electric $500 million, CVS $480 million, American Financial Group $350 million,
CMS Energy $300 million, Kansas Gas & Electric $300 million, and Entergy
Mississippi $150 million.
The list of junk issuers included Right Aid $410 million, Interpublic $600
million, Penn Virginia Corp $300 million, Connacher Oil $200 million, Wallace
Theater $157 million, and Clearwater Paper $150 million.
June 11 - Bloomberg (Pierre Paulden and Katherine Burton): "Convertible bonds
that punished hedge funds in 2008 are driving returns at Canyon Partners and
Citadel Investment Group LLC and helping companies… raise capital. Canyon, the
$14.4 billion investment firm run by former Drexel Burnham Lambert Inc.
bankers, gained more than 51% in its convertible fund through May 22… Citadel
posted a 21% return in its two main funds through May, aided by convertible
bets."
I saw no convert issuance this week.
International dollar debt issuers included Ontario $4.0bn, Suncorp-Metway
$2.5bn, Australian & New Zealand Bank $1.5bn, Korea Hydro & Nuclear
$1.0bn, BNP Paribas $450 million, Lloyds Bank $250 million, and Royal Bank of
Canada $200 million.
June 12 - Bloomberg (Garfield Reynolds): "Emerging-market equity funds received
$3.4 billion in the week to June 10, the 14th-straight week of net inflows…
EPFR Global said."
U.K. 10-year gilt yields rose 5 bps to 3.97%, while German bund yields dropped
9 bps to 3.63%. The German DAX equities index was little changed (up 5.4%).
Japanese 10-year "JGB" yields added 2 bps to 1.51%. The Nikkei 225 jumped 3.8%
(up 14.4%). Emerging markets were mixed. Brazil's benchmark dollar bond yields
declined 3 bps to 5.97%. Brazil's Bovespa equities index added 0.2% (up 42.6%
y-t-d). The Mexican Bolsa gained 2.2% (up 13.8% y-t-d). Mexico's 10-year $
yields jumped 27 bps to 6.24%. Russia's RTS equities index was unchanged (up
78.4%). India's Sensex equities index increased 0.9% (up 58%). China's Shanghai
Exchange slipped 0.4% (up 50.7%).
Freddie Mac 30-year fixed mortgage rates surged 30 bps to 5.59% (down 73bps
y-o-y), with a 3-week gain of 77 bps. Fifteen-year fixed rates jumped 27 bps to
5.06% (down 87bps y-o-y). One-year ARMs gained 23 bps to 5.04% (down 5bps
y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed
jumbo rates up 11 bps to 6.67% (down 59bps y-o-y).
Federal Reserve Credit dropped $40.5bn last week to $2.025TN. Fed Credit has
declined $221bn y-t-d, although it expanded $1.148 TN over the past 52 weeks
(131%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 6/10) surged $17.9bn to a record $2.750 TN. "Custody holdings" have been
expanding at an 21.9% rate y-t-d, and were up $448bn over the past year, or
19.5%.
Bank Credit jumped $29.6bn to $9.788 TN (week of 6/3). Bank Credit was up
$373bn year-over-year, or 4.0%. Bank Credit is now down $125bn y-t-d (3.0%
annualized). For the week, Securities Credit rose $33.6bn. Loans & Leases
declined $4.0bn to $7.110 TN (52-wk gain of $212bn, or 3.1%). C&I loans
dropped $17.3bn, with a one-year decline of 0.3%. Real Estate loans expanded
$14.5bn (up 7.0% y-o-y). Consumer loans fell $6.5bn, while Securities loans
gained $7.2bn. Other loans dipped $2.0bn.
Year-to-date total US ABS issuance of $60bn (tallied by JPMorgan's Christopher
Flanagan) is about two-thirds of the $102bn from comparable 2008. US CDO
issuance of $24bn compares to last year's y-t-d $15bn.
M2 (narrow) "money" supply slipped $7.5bn to $8.349 TN (week of 6/1). Narrow
"money" has expanded at a 4.4% rate y-t-d and 9.1% over the past year. For the
week, Currency added $0.9bn, while Demand & Checkable Deposits declined
$6.1bn. Savings Deposits increased $5.2bn, while Small Denominated Deposits
fell $4.3bn. Retail Money Funds declined $3.2bn.
Total Money Market Fund assets (from Invest Co Inst) fell $16.3bn last week to
$3.747 TN. Money fund assets have declined $83bn y-t-d, or 4.9% annualized.
Money funds expanded $306bn, or 8.9%, over the past year.
Total Commercial Paper outstanding declined $14.8bn this past week to $1.230
TN. CP has declined $452bn y-t-d (64% annualized) and $526bn over the past year
(30%). Asset-backed CP sank $32.5bn to $525bn, with a 52-wk drop of $228bn
(30%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were down $38bn y-o-y to $6.798 TN. Reserves have increased $33bn
year-to-date.
Global Credit Market Dislocation Watch
June 10 - Bloomberg (Niklas Magnusson): "Sweden's four largest banks can handle
loan losses in Estonia, Latvia and Lithuania of 150 billion kronor ($20
billion) over a three-year period, the Nordic country's Financial Supervisory
Authority said. 'All of the big banks can withstand extreme pressure in the
coming period,' the… financial watchdog said… 'There is currently no need for
any of the big banks to strengthen their capital adequacy based on the
regulatory requirements.'"
Government Finance Bubble Watch June 8 - Bloomberg (Liz Capo McCormick and Dakin Campbell): "The biggest
price swings in Treasury bonds this year are undermining Federal Reserve
Chairman Ben S. Bernanke's efforts to cap consumer borrowing rates and pull the
economy out of the worst recession in five decades… The rise in borrowing costs
in the face of record low interest rates, Fed purchases and a contracting
economy is the opposite of the challenge Bernanke's predecessor, Alan
Greenspan, confronted when he led the Fed. In February 2005, Greenspan said…
that a decline in long-term bond yields after six rate increases was a
'conundrum.' At the time, he was trying to keep the economy from overheating
and sparking inflation. Now, Bernanke may be facing his own."
June 12 - Bloomberg (Meera Louis): "European governments have approved $5.3
trillion of aid, more than the annual gross domestic product of Germany, to
support banks during the credit crunch, according to a European Union document.
The U.K. pledged 781.2 billion euros ($1.1 trillion) to restore confidence in
its lenders, the most of any of the 27 EU members…"
Currency Watch
June 12 - Bloomberg (Joshua Goodman and Michael Forsythe): "Leaders of Brazil,
Russia, India and China will probably use their first summit next week to press
the case that their 15% share of the world economy and 42% of global currency
reserves should give them more clout… Brazil and Russia joined China this week
in saying they would shift some $70 billion of reserves into multicurrency
bonds issued by the International Monetary Fund… 'The rebalancing of relative
economic power is not only alive but gaining momentum,' said Mohamed El-Erian,
chief executive officer of Pacific Investment Management… 'Average investors
need to make sure that they are not hostage to an outdated conventional wisdom
that underexposes them to this phenomenon.'"
June 9 - Bloomberg: "The world should discuss ideas to reform the global
monetary system, though any talk of dumping the dollar is 'unrealistic,'
China's Vice Foreign Minister He Yafei said. 'No one is talking about dumping
the dollar…Some experts and scholars have proposed the idea of a super
sovereign currency. We should have such a discussion." Russian President Dmitry
Medvedev last week proposed that nations use a mix of regional reserve
currencies to reduce reliance on the dollar. The subject may be on the agenda
when he meets his counterparts on June 16 in the Ural Mountains city of
Yekaterinburg, the Kremlin said…"
June 8 - Bloomberg (Shanthy Nambiar and Lilian Karunungan): "The BRICs are
buying dollars at the fastest pace since before credit markets froze in
September, protecting exports even as leaders of the biggest emerging markets
consider alternatives to the US currency. Brazil, Russia, India and China
increased foreign reserves by more than $60 billion in May to limit currency
gains as the first global recession since World War II restricted exports, data
compiled by central banks and strategists show. Brazil bought the most dollars
in a year, India's reserves gained the most since January 2008 and Russia added
the most foreign exchange since July."
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