Page 2 of 3 CREDIT BUBBLE BULLETIN The greatest cost
Commentary and weekly watch by Doug Noland
confidence. Can the underlying economic structure service the mounting debt
load or, instead, is it the massively inflating debt load that is sustaining a
vulnerable economy? And it is in this vein that I fear the government finance
bubble is on track to destroy the creditworthiness of the entire economy. And
this Ponzi dynamic is the greatest cost to what I fear is a continuation of
unsound policymaking.
WEEKLY WATCH
The S&P500 gained 1.3% (down 2.8% y-t-d), and the Dow rose 1.7% (down
6.4%). The Morgan Stanley Cyclicals jumped 3.3% (up 12.0%), and the Morgan
Stanley Retail index added 1.1% (up 32.6%). The Utilities surged 4.7% (down
10.1%), and the Transports added 0.4% (down 10.9%). The Morgan Stanley
Consumer index advanced 2.5% (down 2.3%). The S&P400 Mid-caps gained 1.6%
(up 3.8%), and the small cap Russell 2000 rose 1.7% (down 2.5%). The Nasdaq100
increased 1.7% (up 15.3%), and the Morgan Stanley High Tech index added 0.3%
(up 24.0%). The InteractiveWeek Internet index jumped 2.6% (up 34.2%), and the
Semiconductors gained 1.8% (up 21.6%). The Biotechs rose 1.5%, reducing y-t-d
declines to 3.1%. The Broker/Dealers dropped 1.5% (up 17.8%), and the Banks
sank 7.0% (down 27.5%). With Bullion down $27, the HUI Gold index fell 3.0%
(down 0.4%).
One-month Treasury bill rates ended the week at 5 bps, and three-month bills
closed at 16 bps. Two-year government yields dropped 9.5 bps to 0.85%. Five
year T-note yields rose 5.5 bps to 1.99%. Ten-year yields jumped 17 bps to
3.16%. The long-bond saw yields surge 20 bps to 4.08%. The implied yield on
3-month December '09 Eurodollars sank 9.5 bps to 1.23%. Benchmark Fannie MBS
yields increased 10 bps to 4.07%. The spread between benchmark MBS and 10-year
T-notes narrowed 6 to 91 bps (near 5-year lows). Agency 10-yr debt spreads
tightened 7.5 to 42 bps (low since last June). The 2-year dollar swap spread
declined 3 to 58.75 bps; the 10-year dollar swap spread was little changed at
14.75 bps; and the 30-year swap spread was little changed at negative 36.25
bps. Corporate bond spreads tightened meaningfully. An index of investment
grade bond spreads tightened 13 to a 4-month low 223 bps, and an index of junk
spreads narrowed 44 to a 5-month low 1,055 bps.
Corporate issuance picked up this week. Investment grade issuers included C
$7.0bn, Credit Suisse NY $2.25bn, Goldman Sachs $2.0bn, ITT $1.0bn, Potash
$1.0bn, Diamond Offshore $500 million, Florida Gas Transmission $600 million,
Northern Trust $500 million, Rockwell Collins $300 million, and GATX $300
million.
April 27 - Bloomberg (Paul Armstrong): "The three-month moving average for
high-yield debt defaults is about 14%, according to Goldman Sachs Group Inc ...
The annualized default rate for March was an 'eye-popping' 19.4%, the bank said
... 'Equally eye-popping are recovery rates, where default losses for unsecured
bonds continue to realize at levels below our forecast of 12.5%,' Goldman
analysts said ... ."
Junk issuers included Whirlpool $850 million, Ingles Markets $575 million,
Starwood Hotels $500 million, and Jarden $300 million.
I saw no convert issuance this week.
International dollar debt issuers included Leaseplan Corp $2.5bn, Mubadala
Development $1.75bn, Turkey $1.5bn, and Encana $500 million.
UK 10-year gilt yields rose 7 bps to 3.55%, while German bund yields dipped 2
bps to 3.17%. The German DAX equities index gained 1.8% (down 0.9%). Japanese
10-year "JGB" yields were down 3 bps to 1.40%. The Nikkei 225 jumped 3.1% (up
1.3%). The emerging markets were mostly higher. Brazil's benchmark dollar bond
yields dropped 10 bps to 6.27%. Brazil's Bovespa equities index added 1.1% (up
25.9% y-t-d). Flu fear hit the Mexican Bolsa for 3.0% (down 2.2% y-t-d).
Mexico's 10-year $ yields added one basis point to 6.12%. Russia's RTS equities
index was little changed (up 31.8%). India's Sensex equities index increased
0.7% (up 18.2%). China's Shanghai Exchange rose 1.2% (up 36.1%).
Freddie Mac 30-year fixed mortgage rates dipped 2 bps to 4.78% (down 128bps
y-o-y). Fifteen-year fixed rates were unchanged at 4.48% (down 111bps y-o-y).
One-year ARMs fell 5 bps to 4.77% (down 52bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 12 bps to 6.40%
(down 77bps y-o-y).
Federal Reserve Credit dropped $81.5bn last week to $2.088 TN. Fed Credit has
dropped $159bn y-t-d, although it expanded $1.223 TN over the past 52 weeks
(142%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 4/29) gained $3.1bn to a record $2.651 TN. "Custody holdings" have been
expanding at a 16.3% rate y-t-d, and were up $387bn over the past year, or
17.1%.
Bank Credit sank $77.5bn to $9.631 TN (week of 4/22). Bank Credit was up $219bn
year-over-year, or 2.3%. Bank Credit was down $282bn y-t-d (9.2% annualized).
For the week, Securities Credit dropped $46.1bn. Loans & Leases fell
$31.5bn to $7.004 TN (52-wk gain of $116bn, or 1.7%). C&I loans declined
$10.2bn, with one-year growth reduced to 1.5%. Real Estate loans sank $12.8bn
(up 4.4% y-o-y). Consumer loans declined $7.9bn, and Securities loans dipped
$0.9bn. Other loans added $0.3bn.
M2 (narrow) "money" supply declined $4.4bn to $8.245 TN (week of 4/20). Narrow
"money" has expanded at a 1.9% rate y-t-d and 8.1% over the past year. For the
week, Currency was little changed, while Demand & Checkable Deposits
declined $16.8bn. Savings Deposits jumped $21.9bn, while Small Denominated
Deposits fell $5.7bn. Retail Money Funds slipped $3.6bn.
Total Money Market Fund assets (from Invest Co Inst) fell $8.0bn to $3.798 TN
(low since week of 12/17). Money fund assets have declined $32bn y-t-d, or 2.6%
annualized. The 52-wk expansion was reduced to $380bn, or 11.1%.
Total Commercial Paper outstanding sank $49.7bn this past week to $1.422 TN
(low since 2001). CP has declined $259bn y-t-d (47% annualized) and $343bn over
the past year (19.4%). Asset-backed CP dropped $25.8bn to $645bn, with a 52-wk
drop of $125bn (16.3%).
More signs of liquidity returning to the ABS market. Year-to-date total US ABS
issuance of $25.7bn (tallied by JPMorgan's Christopher Flanagan) is less than
half of the $69.5bn from comparable 2008. US CDO issuance of $20.9bn compares
to last year's y-t-d $13.5bn.
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were y-o-y to $6.665 TN. Reserves have declined $282bn over the
past 28 weeks.
Global Credit Market Dislocation Watch
May 1 - Bloomberg (Margaret Chadbourn): "Silverton Bank of Atlanta, a closely
held commercial bank, was closed by a regulator, the 30th US lender to fail
this year amid the worst recession in half a century."
April 29 - Bloomberg (Robert Schmidt and Rebecca Christie): "At least six of
the 19 largest US banks require additional capital, according to preliminary
results of government stress tests, people briefed on the matter said. While
some of the lenders may need extra cash injections from the government, most of
the capital is likely to come from converting preferred shares to common
equity, the people said."
April 27 - Bloomberg (Alison Vekshin): "Federal Deposit Insurance Corp.
Chairman Sheila Bair sought authority to close 'systemically important'
financial firms, expanding powers her agency uses to wind down failing
commercial banks. The new powers would let the FDIC take over an institution
and shut it down, imposing the costs on investors and creditors rather than
taxpayers who absorb losses when government protects companies deemed 'too big
to fail' ... "
April 27 - Financial Times (Krishna Guha): "The ideal interest rate for the US
economy in current conditions would be minus 5%, according to internal analysis
prepared for the Federal Reserve's last policy meeting. The analysis was based
on a so-called Taylor-rule approach that estimates an appropriate interest rate
based on unemployment and inflation. A central bank cannot cut interest rates
below zero. However, the staff research suggests the Fed should maintain
unconventional policies that provide stimulus roughly equivalent to an interest
rate of minus 5% ... They suggested that the Fed should expand its asset
purchases by even more than the $1,150bn increase policymakers authorised at
the last meeting ... "
April 30 - Bloomberg (David M. Levitt and Simon Packard): "HSBC Holdings Plc's
planned sale of its London, New York and Paris offices may bring Europe's
biggest bank about 40% less than the properties would have fetched at the 2007
market peak ... "
April 30 - Bloomberg (Abigail Moses): "Credit markets in the US and Europe
headed for their biggest monthly rally in a year ... The cost of protecting
corporate bonds from default is set to fall the most since the rescue of Bear
Stearns Cos. boosted investor optimism in April last year, traders of
credit-default swaps said."
May 1 - Bloomberg (Laura Cochrane): "Emerging-market governments and companies
sold more bonds in April than at any time in the past two years ... The $25.5
billion raised in April is the most since May 2007 and brings the total for
2009 to $55.7 billion, 72% more than in the same period last year ... "
May 1 - Bloomberg (Cristina Alesci): "High-yield corporate bonds rallied the
most since Michael Milken helped create a market for the securities in the
1980s. Junk bonds returned 11% in April, the best performance since at least
1987, according to Merrill Lynch ... Investors injected $1.79 billion into US
high-yield bond funds in the four weeks ended April 29, according to AMG ... "
April 30 - Bloomberg (Laura Cochrane, Garth Theunissen and Michael Patterson):
"Emerging-market stocks are poised for their best month in 20 years ... The
MSCI Emerging Market Index surged 17%, the steepest gain since April 1989 ... "
Government Finance Bubble Watch
April 29 - Bloomberg (Rebecca Christie): "The Treasury plans to sell a record
$71 billion in long-term debt next week and also will add more 30-year bond
sales to its auction calendar, as part of efforts to finance the record US
budget deficit."
April 27 - Bloomberg (Jeremy R. Cooke): "The federally subsidized Build America
Bonds program may grow to $100 billion in annual sales and pose risks to state
and local governments' credit quality and refinancing practices, Municipal
Market Advisors said. Issuers led by California in the past two weeks have sold
more than $7.5 billion of taxable debt eligible for the 35% federal cash rebate
on their interest costs ... The success of the bonds may drive increased
borrowing, burdening issuers with long-term debt that isn't paid down on a
yearly basis and can't be refinanced as economically as traditional municipal
deals, the ... firm said ... "
April 30 - Bloomberg (Hugo Miller and Alexandre Deslongchamps): "Canadian
governments will contribute $2.42 billion to a $10.5 billion fund to help
Chrysler LLC operate under bankruptcy protection, Canadian officials said ... "
April 30 - Financial Times (Raphael Minder): "The Asian Development Bank plans
to pump an extra $3bn into economies struggling to respond to the financial
crisis and boost its project lending by $10bn over the next two years. The
ADB's lending boost comes after shareholders approved a trebling of its capital
base, from $55bn to $165bn."
May 1 - Bloomberg (Gabrielle Coppola): "Federal guarantees by 13 countries on
more than $400 billion of financial company bonds are punishing the AAA-rated
World Bank Group with record borrowing costs ... The World Bank, founded in
1944 to rebuild economies after World War II, sold $6 billion of three-year
notes ... to yield 30 bps more than the benchmark ... The spread was the widest
for a dollar-denominated bond offering by the supranational lender ... "
April 30 - Bloomberg (Kyunghee Park): "South Korea plans to provide 11.5
trillion won ($8.8 billion) of shipping finance this year to help shipowners
pay for existing contracts and place new orders."
April 27 - Bloomberg (Ian Guider): "Ireland's government is preparing to buy 90
billion euros ($119 billion) of property loans in a bid to stave off
nationalizing its biggest lenders. It may still end up with majority control of
the country's banks."
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