Page 2 of 3 CREDIT BUBBLE BULLETIN Q1's flow of funds Commentary and weekly watch by Doug Noland
to 4.79%. The spread between benchmark MBS and 10-year T-notes narrowed 10 bps
to 101 bps. Agency 10-yr debt spreads widened 5 to 25 bps. The 2-year dollar
swap spread increased 6.25 to 48 bps; the 10-year dollar swap spread declined
2.0 to 25.75 bps; and the 30-year swap spread increased 10 to negative 13.25
bps. Corporate bond spreads were wider. An index of investment grade bond
spreads widened 20 to 192 bps, and an index of junk spreads widened 14 to 871
bps.
Investment grade issuers included Pacific Life Insurance $1.0bn, Comcast
$1.5bn, General Dynamics $750 million, Lincoln National $500 million, Valspar
$300 million, Magellan Midstream
$300 million, and Mellon Foundation $230 million.
Junk bond funds saw inflows of $323 million (from AMG), 14 straight weeks of
positive flows. The list of junk issuers included Capital One $1.5bn, Lorillard
Tobacoo $750 million, RailAmerica $740 million, Quicksilver Resources $600
million, Wendy's/Arby's Group $565 million, Limited Brands $500 million,
Cinemark $470 million, CB Richard Ellis $450 million, Terremark Worldwide $420
million, Continental Airlines $390 million, and Paetec $350 million.
I saw no convert issuance this week.
International dollar debt issuers included Commonwealth Bank of Australia
$2.5bn, Dexia credit $4.0bn, Telecom Italia $2.0bn, Swedbank $1.5bn, Deutsche
Telekom $1.5bn, Lloyds Bank $635 million, and BNP Paribas $500 million.
U.K. 10-year gilt yields fell 16 bps to 3.81%, and German bund yields dropped
13 bps to 3.50%. The German DAX equities index dropped 4.5% (up 0.6%). Japanese
10-year "JGB" yields declined 7 bps to 1.44%. The Nikkei 225 lost 3.4% (up
10.5%). Emerging markets were mostly lower. Brazil's benchmark dollar bond
yields surged 29 bps to 6.30%. Brazil's Bovespa equities index dropped 4.1% (up
36.8% y-t-d). The Mexican Bolsa sank 4.7% (up 8.5% y-t-d). Mexico's 10-year $
yields added about a basis point to 6.23%. Russia's RTS equities index sank
10.3% (up 60.1%). India's Sensex equities index dropped 4.7% (up 50.5%).
China's Shanghai Exchange jumped 5.0% (up 58.2%).
Freddie Mac 30-year fixed mortgage rates sank 21 bps to 5.38% (down 104bps
y-o-y), with a 4-week rise of bps. Fifteen-year fixed rates fell 17 bps to
4.89% (down 113bps y-o-y). One-year ARMs declined 9 bps to 4.95% (down 24bps
y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed
jumbo rates down 10 bps to 6.57% (down 83bps y-o-y).
Federal Reserve credit jumped $29.4bn last week to $2.055TN. Fed credit has
declined $191bn y-t-d, although it expanded $1.178 TN over the past 52 weeks
(134%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 6/17) increased $2.1bn to a record $2.752 TN. "Custody holdings" have
been expanding at an 20.3% rate y-t-d, and were up $435bn over the past year,
or 18.8%.
Bank credit dropped $59bn to $9.722 TN (week of 6/10). Bank credit was up
$317bn year-over-year, or 3.4%. Bank credit is now down $191bn y-t-d (4.4%
annualized). For the week, Securities credit sank $32.6bn. Loans & Leases
dropped $26.4bn to $7.078 TN (52-wk gain of $180bn, or 2.6%). C&I loans
declined $5.9bn, with a one-year decline of 0.9%. Real Estate loans fell $7.4bn
(up 6.5% y-o-y). Consumer loans declined $4.3bn, and Securities loans fell
$5.5bn. Other loans dipped $3.2bn.
Year-to-date total US ABS issuance of $61bn (tallied by JPMorgan's Christopher
Flanagan) compares to the $105bn from the same period of 2008. US CDO issuance
of $23.6bn compares to last year's y-t-d $16.5bn.
M2 (narrow) "money" supply gained $4.4bn to $8.354 TN (week of 6/8). Narrow
"money" has expanded at a 4.3% rate y-t-d and 9.3% over the past year. For the
week, Currency added $1.5bn, and Demand & Checkable Deposits jumped
$32.8bn. Savings Deposits fell $15.8bn, and Small Denominated Deposits declined
$3.1bn. Retail Money Funds dropped $11.1bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $72.9bn last week
to $3.675 TN. Money fund assets have declined $156bn y-t-d, or 8.8% annualized.
Money funds grew $199bn, or 5.7%, over the past year.
Total Commercial Paper outstanding dropped $27.8bn this past week to $1.202 TN.
CP has declined $479bn y-t-d (62% annualized) and $549bn over the past year
(31%). Asset-backed CP sank $22.2bn to $503bn, with a 52-wk drop of $278bn
(33%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were down $33bn y-o-y to $6.793 TN. Reserves have increased $28bn
year-to-date.
Global Credit Market Dislocation Watch
June 17 - Bloomberg (Caroline Salas): "Almost two years into the worst
financial calamity since the 1930s, companies are doing everything they can to
reduce their indebtedness, selling record amounts of equity to pay back bonds
and loans. ‘Stock buybacks are a thing of the past: It's reducing debt and bond
buybacks that are in vogue,' said Kathleen Gaffney, co-manager of the Loomis
Sayles Bond Fund … ‘Stocks aren't going to move and earnings aren't going to
move without a healthier balance sheet,' said Gaffney… More than 165 companies
raised a record $87 billion in US secondary share sales this quarter, and 77%
of them used the proceeds to slash leverage, according to… Bloomberg."
June 15 - Bloomberg (Frances Robinson): "Commercial banks in the 16-nation euro
region may lose a further $283 billion by the end of next year as the financial
crisis forces them to write off bad loans, the European Central Bank said.
‘Hard-to-value assets have remained on bank balance sheets and the marked
deterioration in the economic outlook has created concerns about the potential
for sizeable loan losses,' the… ECB said…"
June 16 - Bloomberg (Caroline Hyde): "As many as 14% of investment grade
European companies will be unable to meet their cash requirements in the next
12 months even as bond issuance is at record levels, according to Moody's… For
high-risk, high-yield companies the situation is worse, with as many as 20%
failing to have sufficient cash to meet outflows…"
June 18 - Bloomberg (Denis Maternovsky): "OAO Sberbank, VTB Group and Russia's
other lenders are facing a surge in ‘troubled assets' that may total $213
billion, S&P said. As much as 38% of all assets held by Russian banks… may
become problematic by the end of 2011… ‘The extent of the damage and its impact
on the Russian banking industry will depend, in our view, on government
policies to support banks and shore up troubled industrial enterprises,
including state-owned companies,' said Scott Bugie, an S&P analyst."
Government Finance bubble Watch
June 16 - UPI: "The Chinese government says fiscal revenues in May rose 4.8% to
$96.05 billion from the same month last year… The finance ministry said the May
numbers represent a reversal of the downward trend of the past few months,
China Daily reported… Federal and local government revenues in the first five
months of this year totaled 2.71 trillion yuan or about $396 billion, down 6.7%
from last year…"
Currency Watch
June 17 - Associated Press: "Russian President Dmitry Medvedev says the world
needs new reserve currencies. Medvedev told a regional summit Tuesday that the
creation of new reserve currencies in addition to the dollar is needed to
stabilize global finances. Medvedev has made the proposal before. It reflects
both the Kremlin's push for greater international clout and a concern shared by
other countries that soaring US budget deficits could spur inflation and weaken
the dollar. Airing it at a summit meeting underlined the challenge to US
clout."
June 17 - Bloomberg (Lyubov Pronina): "China and Russia agreed to promote the
use each other's currencies more in bilateral trade, relying less on the US
dollar, the presidents of the two countries said."
June 16 - Bloomberg (Lyubov Pronina and Alex Nicholson): "Brazil, Russia, India
and China are considering buying each other's bonds and swapping currencies to
lessen dependence on the US dollar, Russian President Dmitry Medvedev's top
economic adviser said. The leaders of the so-called BRIC countries will discuss
measures to promote regional currencies when they meet later today, Arkady
Dvorkovich told reporters in the Ural Mountains city of Yekaterinburg before
the first BRIC summit. ‘There will be talk about increasing the share of mutual
trade in national currencies, possibly placing part of reserves in the
financial instruments of partner countries,' Dvorkovich said."
June 16 - Bloomberg: "China's purchases of foreign assets including US
Treasuries depend on its own needs, Foreign Ministry spokesman Qin Gang told a
regular news briefing… ‘We operate according to the principles of security,
liquidity and good value and according to our need… As to how much to buy, when
to buy, these all depend on the above," he said…"
June 16 - Wall Street Journal (Riva Froymovich and Deborah Lynn Blumberg):
"Foreign and US investors moved capital out of US assets in April, with much of
the outflows concentrated in short-term securities… The switch in capital flows
reflect investors' greater appetite for risk. Foreign investors sold
dollar-denominated assets they had bought to shelter their portfolios from
turbulent markets. US investors, meanwhile, bought more foreign securities. Net
outflows in April, including short-term securities and changes in bank
deposits, totaled $53.2 billion…"
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