Page 2 of
3 CREDIT BUBBLE
BULLETIN Throwing good after
bad Commentary and weekly watch
by Doug Noland
Fortunately for the
eurozone, Germany and other "core" economies have
powerful manufacturing and export sectors that
tend to underpin system stability. Unfortunately,
the core is now seemingly trapped in costly
ongoing subsidies to the European periphery. Here
at home in the United States, the core" is the
problem. There is no credible plan to get runaway
federal deficits under control - and the markets
are for now just fine with it.
WEEKLY
TIMES For the week, the S&P500 slipped
0.2% (up 5.8% y-t-d), and the Dow dipped 0.6% (up
7.5%). The broader market outperformed. The
S&P 400 Mid-Caps added 0.3% (up 9.1%), and the
small cap
Russell 2000 rallied 0.9% (up
6.7%). The Morgan Stanley Cyclicals were unchanged
(up 3.4%), while the Transports slipped 0.7% (up
5.9%). The Morgan Stanley Consumer index declined
1.2% (up 4.3%), and the Utilities dropped 1.7% (up
5.8%). The Banks were little changed (down 4.8%),
while the Broker/Dealers added 0.1% (down 5.7%).
The Nasdaq100 declined 0.7% (up 5.3%), and the
Morgan Stanley High Tech index fell 0.7% (up
2.5%). The Semiconductors added 0.1% (up 5.2%).
The InteractiveWeek Internet index declined 0.9%
(up 3.1%). The Biotechs fell 1.0% (up 12.7%). With
bullion jumping $51, the HUI gold index rallied
3.9% (down 4.0%).
One-month Treasury bill
rates ended the week at 3 bps and three-month
bills closed at 4 bps. Two-year government yields
declined 3 bps to 0.48%. Five-year T-note yields
ended the week down 7 bps to 1.72%. Ten-year
yields dropped 7 bps to 3.08%. Long bond yields
fell 6 bps to 4.24%. Benchmark Fannie MBS yields
declined 6 bps to 3.93%. The spread between
10-year Treasury yields and benchmark MBS yields
widened one to 85 bps. Agency 10-yr debt spreads
declined 2 to negative 4 bps. The implied yield on
December 2011 eurodollar futures was unchanged at
0.40%. The 10-year dollar swap spread was little
changed at 9.75 bps. The 30-year swap spread
declined one to negative 25 bps. Corporate bond
spreads were somewhat wider. An index of
investment grade bond risk added a basis point to
91 bps. An index of junk bond risk rose 7 bps to
452 bps.
Investment-grade issuers included
Hewlett-Packard $5.0bn, Caterpillar $4.5bn,
Barrick $4.0bn, Cameron International $750
million, AON $500 million, RPM International $450
million, Tupperware $400 million, Reinsurance
Group of America $400 million, GE Capital $350
million, Duquesne Light $350 million, GATX $250
million, Markel $250 million, Oklahoma G&E
$250 million, and Gamco $100 million.
Junk
bond funds inflows declined to $98 million (from
Lipper). Junk issuers included Oil States
International $600 million, Level 3 $600 million,
Regency Energy $500 million, GM Finance $500
million, Exopack $235 million, and WCA Waste $175
million.
Convert issuers included Akorn
$100 million.
International dollar bond
issuers included OGX Petroleo $2.56bn, Vendanta
Resources $1.65bn, Rentenbank $1.5bn, Sweden
$1.5bn, Petroleos Mexicanos $1.25bn, Boligkreditt
$1.25bn, Bancolombia $1.0bn, Credit Suisse $1.0bn,
Russian Agricultural Bank $800 million, CGG
Veritas $650 million, TAM $500 million, Lonking
Holdings $350 million, Gala Group $350 million,
International Auto Components $300 million, and
Forbes Energy $280 million.
U.K. 10-year
gilt yields declined 5 bps this week to 3.29%
(down 22bps y-t-d), and German bund yields fell 7
bps to a 4-month low 2.98% (up 2bps). Ten-year
Portuguese yields jumped 20 bps to 9.35% (up
277bps). Irish yields surged 54 bps to 10.85% (up
180bps), while Greek 10-year bond yields declined
15 bps to 16.22% (up 376bps). Two-year Greek
yields dropped 14 bps this week to 24.58%. Spain's
10-year yields fell 16 bps to 5.31% (down 13bps).
The German DAX equities index declined 1.4% (up
3.6% y-t-d). Japanese 10-year "JGB" yields were
unchanged at 1.12% (unchanged). Japan's Nikkei
declined 0.9% (down 6.9%). Emerging markets were
mixed. For the week, Brazil's Bovespa equities
index rallied 2.7% (down 7.2%), and Mexico's Bolsa
gained 1.5% (down 7.1%). South Korea's Kospi index
slipped 0.5% (up 2.4%). India's equities index
dipped 0.3% (down 10.9%). China's Shanghai
Exchange sank 5.2% (down 3.5%). Brazil's benchmark
dollar bond yields added about a basis point to
4.24%, and Mexico's benchmark bond yields rose 4
bps to 4.07%.
Freddie Mac 30-year fixed
mortgage rates slipped a basis point to 4.60%
(down 18bps y-o-y). Fifteen-year fixed rates
declined 2 bps to 3.78 (down 43bps y-o-y).
One-year ARMs were down 4 bps to 3.11% (down 84bps
y-o-y). Bankrate's survey of jumbo mortgage
borrowing costs had 30-yr fixed jumbo rates down 3
bps to 5.09% (down 55bps y-o-y).
Federal
Reserve Credit jumped $11.2bn to a record $2.751
TN (29-wk gain of $470bn). Fed Credit was up
$343bn y-t-d and $427bn from a year ago, or 18.4%.
Elsewhere, Fed Foreign Holdings of Treasury,
Agency Debt this past week (ended 5/25) dipped
$0.4bn to $3.442 TN. "Custody holdings" were up
$92bn y-t-d and $376bn from a year ago, or 12.3%.
Global central bank "international reserve
assets" (excluding gold) - as tallied by Bloomberg
- were up $1.476 TN y-o-y, or 17.7%, to a record
$9.829 TN. Over two years, reserves were $3.116 TN
higher, for 47% growth.
M2 (narrow)
"money" supply rose $10.4bn to $8.995 TN. "Narrow
money" has expanded at a 4.7% pace y-t-d and 4.7%
over the past year. For the week, Currency
increased $1.7bn. Demand and Checkable Deposits
jumped $5.6bn, and Savings Deposits rose $3.1bn.
Small Denominated Deposits declined $3.1bn. Retail
Money Funds gained $3.0bn.
Total Money
Fund assets expanded $9.6bn last week to $2.748
TN. Money Fund assets were down $62bn y-t-d, with
a decline of $101bn over the past year, or 3.6%.
Total Commercial Paper outstanding jumped
another $14.8bn to $1.198 Trillion, the high since
December 2009. CP was up $229bn y-t-d, or 48.5%
annualized, with a one-year rise of $125bn.
Global Credit Market Watch May
24 - Bloomberg (Mark Deen): "European Central Bank
Governing Council member Christian Noyer ruled out
a restructuring of Greece's debt, calling it a
'horror story' that would leave the nation shut
out of financing for years. 'There's no solution
possible' for Greece other than to follow its
austerity program, Noyer told reporters ...
'Restructuring is not a solution, it's a horror
story,' and if the country fails to meet the terms
of its bailout, Greek government debt will be
'ineligible as collateral' at the ECB."
May 27 - Bloomberg (Boris Groendahl):
"Euro-area policy makers trying to avert a
financial calamity may turn to a blueprint that
arrested contagion in eastern Europe after Lehman
Brothers Holdings Inc. collapsed. A plan, modeled
on the Vienna Initiative of 2009, would involve
leaning on creditors to roll over expiring bonds,
buying time for Greece until its austerity program
shows results or until a law takes effect in 2013
permitting sovereign-debt writedowns ... 'It's
burden sharing without restructuring,' said Mark
Wall, Deutsche Bank AG's ... chief euro-area
economist. 'You're not changing the terms of
outstanding bonds, you're not lengthening their
maturities, you're not imposing haircuts on them.
The bonds will mature but new bonds will be
issued. What you're asking the creditors to do is
to participate in those new issues,' he said. Such
a proposal may bridge differences among European
leaders over allowing a Greek debt restructuring
... "
May 23 - Bloomberg (Abigail Moses
and John Glover): "Government borrowing costs may
rise if Greece restructures its debt without
triggering credit-default swaps because investors
will lose faith in their ability to protect
against losses, according JPMorgan ... Greece has
significant latitude to restructure its
liabilities without triggering the contracts but
doing so would 'spill over' into cash bonds and
risk infecting other peripheral markets, said ...
strategist Pavan Wadhwa ... Investors are
concerned that Greece may seek to avoid triggering
the contracts to avoid reputational damage and
punish speculators as it looks for ways to reduce
its interest payments. 'CDS, which is generally
speaking used as a hedge against cash bonds, will
likely no longer be viewed as a viable hedge,'
Wadhwa said. 'Counterparties who are holding CDS
protection will likely be forced to unwind those
trades and physically sell cash bonds in order to
hedge their risks.'"
May 24 - Bloomberg
(Paul Dobson): "Investors are demanding more yield
to hold bonds from the European Union's two
bailout funds rather than benchmark German notes,
suggesting forthcoming sales won't sell as well as
their debut auctions did. Five-year European
Financial Stabilization Mechanism securities sold
in January yield 30 bps more than similar-maturity
German debt, the most since March 24, and up from
22 bps on Feb. 9."
May 24 - Bloomberg
(Boris Korby): "Brazilian companies from Banco do
Brasil SA to Marfrig Alimentos SA are boosting the
size of international bond sales to a record to
finance growing investment plans in Latin
America's biggest economy. The average size of
dollar debt offerings soared 85% in the past two
years to $577 million, the highest level since
Bloomberg began compiling the data in 1999. In the
US, the average size of corporate debt sales
declined 19%... to $585 million. Brazilian
borrowers are boosting offerings to pay for
investments in everything from oil drilling to
increasing consumer lending ... Companies are also
taking advantage of growing investor demand for
emerging-market assets that is pushing down
borrowing costs."
May 25 - Bloomberg
(Sapna Maheshwari): "Borrowers ... are selling
floating-rate notes at the fastest pace in four
years as the Federal Reserve plots its exit from
record monetary stimulus. Offerings ... helped
push such issuance to $102.7 billion this year ...
That compares with $42.2 billion a year earlier
... "
May 24 - Bloomberg (Lisa
Abramowicz): "Speculative-grade companies are
accelerating bond sales to finance acquisitions
and leveraged buyouts as US private-equity
takeovers surge 76%. About $4.7 billion of last
week's high-yield, high-risk bond offerings were
to pay for purchases and LBOs, the greatest amount
since October, according to JPMorgan ...
May 23 - Bloomberg (Sarah Mulholland):
"Collateralized debt obligations linked to
commercial real estate may emerge as soon as next
month for the first time since 2007 as property
values rebound. Moody's ... has had more than a
dozen requests from Wall Street banks this quarter
to rate new CDOs comprised of loans and securities
tied to commercial mortgages, more than double the
number in the first three months, said Deryk
Meherik, an analyst."
Global Bubble
Watch May 26 - Bloomberg (Tony Czuczka and
Helene Fouquet): "Angela Merkel and Nicolas
Sarkozy walked side by side on an Atlantic beach
boardwalk in October to show their resolve in
combating Europe's debt crisis. Seven months
later, the common bond is fraying. As the German
and French leaders return to the coastal resort of
Deauville today for a Group of Eight summit,
Europe's two biggest nations are squabbling over
approaches to Greek debt, nuclear power and the
war in Libya. Their failure to maintain a united
front may deepen the 18-month-old financial crisis
by weakening an alliance that both have said is
crucial to persuading investors the euro region
can avoid its first default."
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
