Page 2 of
3 CREDIT BUBBLE
BULLETIN S&P starts the
process Commentary and weekly
watch by Doug Noland
S&P puts the odds
of a US debt downgrade in the next two years at
33%. Treasury Secretary Timothy Geithner says it's
zero. I'll put the probability of a downgrade in
the next few years at close to 100%. Until proven
otherwise, I'm going to presume that policymakers
will at some point come to the recognition that
the economy and markets are vulnerable. They will
choose to hold off on the difficult decisions -
that is, until the markets force their hands.
WEEKLY WATCH For the week, the
S&P500 gained 1.3% (up 6.3% y-t-d), and the
Dow rose 1.3% (up 8.0%). Strength was broad-based.
The S&P 400 Mid-Caps rose 1.3% (up 9.7 %), and
the small cap Russell 2000 gained 1.3% (up 7.9%).
The Morgan Stanley Cyclicals
jumped 2.6% (up 6.2%), and the
Transports added 0.1% (up 3.6%). The Morgan
Stanley Consumer index gained 0.3% (up 2.7%), and
the Utilities increased 0.4% (up 2.2%). The Banks
fell 1.3% (down 3.3%), while the Broker/Dealers
added 1.1% (down 0.1%). The Nasdaq100 advanced
2.9% (up 7.2%), and the Morgan Stanley High Tech
index jumped 2.6 % (up 4.5%). The Semiconductors
rose 2.7% (up 7.6%). The InteractiveWeek Internet
index gained 2.4% (up 5.6%). The Biotechs added
0.7% (up 10.8%). With bullion jumping $20 to a
record high $1,507, the HUI gold index gained 2.0%
One-month Treasury bill rates
ended the week at 3 bps and three-month bills
closed at 5 bps. Two-year government yields
declined 3 bps to 0.66%. Five-year T-note yields
ended the week 4 bps higher at 2.11%. Ten-year
yields declined 2 bps to 3.39%. Long bond yields
were little changed on the week at 4.49%.
Benchmark Fannie MBS yields were one basis point
lower to 4.21%. The spread between 10-year
Treasury yields and benchmark MBS yields widened
one to 82 bps. Agency 10-yr debt spreads increased
one basis point to negative 2 bps. The implied
yield on December 2011 eurodollar futures declined
2.5 bps to 0.475%. The 10-year dollar swap spread
declined one to 7.75 bps. The 30-year swap spread
was little changed at negative 22.5 bps. Corporate
bond spreads narrowed modestly. An index of
investment grade bond risk declined one to 93 bps.
An index of junk bond risk fell 4 bps to 440 bps.
Investment grade debt issuers included
Goldman Sachs $2.0bn and Ohio National $250
Junk bond funds saw outflows of
$186 million (from Lipper). Issuers included Sesi
$500 million, MPT Partners $450 million, CDW $450
million, Community Choice Financial $395 million,
and General Shopping $250 million.
no convertible debt issued.
dollar debt issuers included Abbey National $2.5
TN, China National Petroleum $1.85bn, PPL $1.06bn,
Alpha Bank $1.0bn, Evraz $850 million, Orix $800
million, Manitoba $750 million, Calcipar $450
million, Finance Infrastructure $690 million,
Consolidated Minerals $405 million, EMP
Distribuidora Norte $300 million, Dematic $300
million, Turks & Caicos Islands $170 million,
and Geo Maquinaria $160 million.
10-year gilt yields dipped 3 bps this week to
3.525% (up 2bps y-t-d), and German bund yields
dropped 12 bps to 3.26% (up 30bps). The rout in
European periphery bonds gathered momentum this
week. Ten-year Portuguese yields jumped 49 bps to
9.36% (up 278bps). Irish yields surged 73 bps to
10.24% (up 1.19bps), and Greek 10-year bond yields
jumped 101 bps to 14.72% (up 226bps). Spain's
yields gained 5 bps to 5.46% (up 2bps). The German
DAX equities index rose 1.6% (up 5.5% y-t-d).
Japanese 10-year "JGB" yields dropped 7 bps to
1.21% (up 9bps). Japan's Nikkei rallied 0.9% (down
5.3%). Emerging markets were mixed. For the week,
Brazil's Bovespa equities index added 0.6% (down
3.2%), while Mexico's Bolsa declined 0.5% (down
4.5%). South Korea's Kospi index jumped 2.7% (up
7.2%). India's equities index gained 1.1% (down
4.4%). China's Shanghai Exchange declined 1.3% (up
7.2%). Brazil's benchmark dollar bond yields were
little changed at 4.57%, while Mexico's benchmark
bond yields declined about 2 bps to 4.46%.
Freddie Mac 30-year fixed mortgage rates
sank 11 bps to 4.80% (down 27bps y-o-y).
Fifteen-year fixed rates dropped 11 bps to 4.02%
(down 37bps y-o-y). One-year ARMs were down 9 bps
to 3.16% (down 106bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed
jumbo rates down one basis point to 5.42% (down
Federal Reserve Credit
jumped $16.0bn to a record $2.659 TN (24-wk gain
of $379bn). Fed Credit was up $252bn y-t-d and
$341bn from a year ago, or 14.7%. Elsewhere, Fed
Foreign Holdings of Treasury, Agency Debt this
past week (ended 4/20) increased $743 million to a
record $3.419 TN. "Custody holdings" were up
$362bn from a year ago, or 11.9%.
central bank "international reserve assets"
(excluding gold) - as tallied by Bloomberg - were
up $1.731 TN y-o-y, or 21.8%, to a record $9.655
TN. Over two years, reserves were $2.991 TN
higher, or 45% growth.
M2 (narrow) "money"
supply increased $5.7bn to a record $8.928 TN.
"Narrow money" has expanded at a 3.7% pace y-t-d
and 5.2% over the past year. For the week,
Currency increased $3.8bn. Demand and Checkable
Deposits dropped $23.7bn, while Savings Deposits
jumped $33.8bn. Small Denominated Deposits
declined $2.2bn. Retail Money Funds fell $6.0bn.
Total Money Fund assets dropped $36.2bn
last week to $2.710 TN. Money Fund assets were
down $100bn y-t-d, with a decline of $168bn over
the past year, or 5.8%.
Paper outstanding declined $800 million to $1.098
Trillion. CP was up $129bn y-t-d, or 36%
annualized, and $23bn from a year ago (2.1%).
Global Credit Market Watch April
19 - Bloomberg (Keith Jenkins and Emma Charlton):
"Greek note yields reached euro-era records amid
growing speculation the country will need to
restructure its debt as financing costs mount ...
Greece sold 1.625 billion euros ($2.3bn) of
13-week bills at a higher interest rate amid lower
demand than the previous auction of similar debt.
Greek two-year note yields breached 20% for the
first time yesterday."
April 21 -
Bloomberg (Kati Pohjanpalo): "The rise of the
nationalist True Finns party in Helsinki may
increase pressure on Portugal to deepen budget
cuts in order to win aid from the European Union.
The True Finns' third-place finish in April 17
elections has thrust the party to the center of
European bailout politics, giving it a chance to
obstruct the rescues of indebted nations. The
Social Democrats, who also campaigned against
external aid, may join a government with the True
Finns that will be led by Finance Minister Jyrki
Katainen's National Coalition. Finnish politics
are 'a cause for concern for the market,' said
Martin Blum, co-head of asset management at Ithuba
Capital AG ... 'This is a clear warning signal to
other governments in the euro area that doling out
cash for bailouts is politically extremely
Watch April 19 - Financial Times (Sam Jones
and Dan McCrum): "Assets under management in the
global hedge fund industry have soared to an
all-time peak, surpassing the pre-crisis high
thanks to the strongest investor inflows in years.
The world's hedge funds at present manage $2,002bn
of client funds, according to Hedge Fund Research
... That comfortably exceeds the $1,930bn peak of
June 2008, just months before the collapse of
Lehman Brothers triggered big losses and huge
investor redemptions in the industry's worst-ever
crisis. At its nadir, the hedge fund industry's
assets were just $1,330bn in the first quarter of
April 20 - Bloomberg (Jeff Kearns):
"The benchmark index for US stock options slumped
to its lowest intraday level since June 2007 as
shares rallied on better-than-estimated quarterly
reports from companies including Intel Corp. and
Watch April 20 - Bloomberg (Brendan A.
McGrail and Matt Robinson): "Congressional cuts to
US spending, following a negative outlook on
federal debt by Standard & Poor's, may
adversely affect state credit ratings, according
to Janney Montgomery Scott LLC. The ratings
company put the US government on notice that it
risks losing its AAA investment grade unless
politicians agree on a plan by 2013 to reduce
budget deficits and the national debt. S&P
said this week there's a 1-in-3 chance the ranking
may be lowered within two years and that its
'baseline assumption' is that Congress and
President Barack Obama will agree on a plan to
contain deficits before then. There's a 'clear
connection' between the federal government's
credit and states, so the 'trajectory of states'
ratings is more likely to be negative than
positive' as Congress cuts spending, said Guy
LeBas, chief fixed-income strategist at ... Janney
... 'The problem with the degree of government
cutbacks being discussed is that they're so large
that in one way federal government cutbacks are
going to affect every sector of the muni market,'
LeBas said. 'It's now a matter of how much.'
Investors have pulled about $31.6 billion from US
municipal-bond mutual funds since Nov. 10, 22
straight weeks of net withdrawals…"
20 - Wall Street Journal (Michael Corkery and
Jeannette Neumann): "For many cities and states,
the love affair with debt has cooled, as
governments cut back on spending and as borrowing
comes under political attack. In Marquette, a
small city on Michigan's Upper Peninsula,
officials last month voted to nearly halve the
amount of debt the city plans to issue in fiscal
2012 from the year ending June 30. 'You get to a
saturation point where too much debt is too much
debt,' said Marquette City Commissioner David
Saint-Onge. The wariness to take on more debt
extends to the municipal-bond market's largest
borrowers, such as California, which this year
plans to issue a little more than half of the
approximately $10 billion in long-term bonds it
sold in 2010. 'It has a lot less to do with the
market, and more to do with trying to get back on
firm fiscal ground,' said Tom Dresslar, spokesman
for the California Treasurer's Office. The change
in attitude raises the prospect that the drought
in municipal-bond issuanceh - the first quarter
was the slowest quarter in 11 years - isn't a
temporary blip but a longer-lasting shift in
municipal borrowing habits."
April 18 -
Bloomberg (Michael Quint and Henry Goldman): "New
York state tax collections for the fiscal year
ended two weeks ago were $926.3 million less than
what was projected in the 2010-11 budget enacted
in August, according to ... Comptroller Thomas
DiNapoli. Revenue totaled $133.3 billion for the
last fiscal year, 5.2% higher than in 2009-10.
Spending increased 6.3% to $134.8 billion…"
Currency Watch April 20 -
Bloomberg (Mario Bessa Lima): "The US government
is devaluating the dollar 'deliberately', Fernando
Pimentel, Brazil's Trade Minister, told