Page 2 of 3 CREDIT BUBBLE BULLETIN Only the timing in doubt Commentary and weekly watch by Doug Noland
I've got to assume that the marketplace is today much keener to the problematic
nature of Ponzi finance dynamics.
The key to the rapid implosion of the mortgage/Wall Street bubble was the
combination of its unwieldy scope and the disappearance of the GSE "backstop
bid". At $2.0 trillion, arguably we've quickly reached ample "scope" in the
market for "federal" obligations. As for the "backstop bid", foreign central
banks have for some years now been massive buyers of Treasuries and agencies
during periods of unwieldy global dollar flows. And with more comments out of
China last week (see "Currency Watch" below), there is even greater support for
the view that foreign appetite for our debt
instruments is waning in the face of the unprecedented inflation in their
quantity. Moreover, market perceptions have Treasuries as bulletproof.
I know better than to try to predict the timing of problems developing in the
Treasury and currency markets. But I do see all the makings for the next
problematic leg of this financial crisis. As I have written before, our
nation's predicament becomes much more problematic when perceptions turn
against the Treasury/agency marketplace.
WEEKLY WATCH
For the week, the S&P500 slipped 0.3% (up 1.7% y-t-d), and the Dow declined
1.2% (down 3.9% y-t-d). The Morgan Stanley Cyclicals were little changed (up
16.2%), while the Transports rallied 1.3% (down 7.7%). The Morgan Stanley
Consumer index slipped 0.1% (up 1.4%), while the Utilities rose 1.4% (down
5.3%). The Banks dropped 2.5% (down 17.8%), while the Broker/Dealers gained
1.0% (up 28.1%). The S&P 400 Mid-Caps dipped 0.2% (up 7.1%), while the
small cap Russell 2000 added 0.1% (up 2.8%). The Biotechs rallied 3.3% (up
8.3%). The Nasdaq100 increased 0.6% (up 22.2%), and the Morgan Stanley High
Tech index added 0.2% (up 32.6%). The Semiconductors lost 0.5% (up 24.0%),
while the InteractiveWeek Internet index gained 0.5% (up 40.7%). With Bullion
up $5.40, the HUI gold index rallied 4.0% (up 16.9%).
One-month Treasury bill rates ended the week at 5 bps, and three-month bills
closed at 18 bps. Two-year government yields sank 16 bps to 1.03%. Five-year
T-note yields sank 28 bps to 2.51%. Ten-year yields dropped 25 bps to 3.53%.
The long-bond saw yields end the week down 17 bps to 4.32%. The implied yield
on 3-month December '09 Eurodollars fell 16 bps to 0.905%. Benchmark Fannie MBS
yields were down 22 bps to 4.58%. Agency 10-yr debt spreads narrowed 2 to 23
bps. The 2-year dollar swap spread declined 10 to 37 bps; the 10-year dollar
swap spread declined 5.5 to 20.25 bps; and the 30-year swap spread declined
5.25to negative 18.5 bps. Corporate bond spreads were mixed. An index of
investment grade bond spreads was little changed at 192 bps, while an index of
junk spreads widened 24 to 901 bps.
Investment grade issuers included Citigroup $5.0 billion, Merck $4.25 billion,
Time Warner $1.5 billion, Omnicom $500 million, Analog Devices $375 million,
Virginia E&P $350 million, Massmutual $300 million, Campbell Soup $300
million, Torchmark $300 million, Enogex $200 million, Rochester G&E $150
million and Gulf Power $140 million.
Junk bond funds saw inflows of $ million (from AMG), 15 straight weeks of
positive flows. The list of junk issuers included Smithfield Foods $625
million, Alliance One $570 million, Univision $545 million, XM Satellite $525
million, RSC Equipment $400 million, Jefferies Group $400 million, Solo Cup
$300 million, and Belden $200 million, and Oxford Industry $150 million.
I saw no convert issuance this week.
International dollar debt issuers included Danske Bank $5.0 billion, Telefonica
Emisiones $2.25 billion, Credit Suisse $1.3 billion, Lloyds Bank $735 million
and Shinhan Bank $500 million.
U.K. 10-year gilt yields fell 12 bps to 3.68%, and German bund yields declined
11 bps to 3.39%. The German DAX equities index slipped 1.3% (down 0.7%).
Japanese 10-year "JGB" yields declined 5 bps to 1.39%. The Nikkei 225 added
0.9% (up 11.5%). Emerging markets were mostly stronger. Brazil's benchmark
dollar bond yields sank 24 bps to 6.00%. Brazil's Bovespa equities index
increased 0.2% (up 37.1% y-t-d). The Mexican Bolsa added 0.8% (up 9.3% y-t-d).
Mexico's 10-year $ yields bps to 6.2%. Russia's RTS equities index sank 5.5%
(up 51.2%). India's Sensex equities index gained 1.7% (up 53.0%). China's
Shanghai Exchange rose 1.7% (up 60.8%).
Freddie Mac 30-year fixed mortgage rates increased 4 bps to 5.42% (down 103bps
y-o-y), with a 5-week rise of 60 bps. Fifteen-year fixed rates slipped 2 bps to
4.87% (down 117bps y-o-y). One-year ARMs declined 2 bps to 4.93% (down 34bps
y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed
jumbo rates down 3 bps to 6.54% (down 84bps y-o-y).
Federal Reserve Credit dropped $58.5 billion last week to $1.997 trillion. Fed
Credit has declined $249 billion y-t-d, although it expanded $1.122 trillion
over the past 52 weeks (128%). Elsewhere, Fed Foreign Holdings of Treasury,
Agency Debt this past week (ended 6/24) jumped $12.3 billion to a record $2.764
trillion. "Custody holdings" have been expanding at an 20.5% rate y-t-d, and
were up $442 billion over the past year, or 19.0%.
Bank Credit increased $3.1 billion to $9.730 trillion (week of 6/17). Bank
Credit was up $340 billion year-over-year, or 3.6%. Bank Credit is now down
$183 billion y-t-d (4.0% annualized). For the week, Securities Credit jumped
$62.5 billion. Loans & Leases sank $59.4 billion to $7.021 trillion (52-wk
gain of $123 billion, or 1.8%). C&I loans fell $11.5 billion, with a
one-year decline of 2.1%. Real Estate loans dropped $37.0 billion (up 5.9%
y-o-y). Consumer loans slipped $1.9 billion, and Securities loans decreased
$2.4 billion. Other loans fell $6.7 billion.
Year-to-date total US ABS issuance of $62.7 billion (tallied by JPMorgan's
Christopher Flanagan) compares to the $108.5 billion from the same period of
2008. US CDO issuance of $23.6 billion compares to last year's y-t-d $16.9
billion.
M2 (narrow) "money" supply increased $15.7 billion to a record $8.369 trillion
(week of 6/14). Narrow "money" has expanded at a 4.6% rate y-t-d and 9.5% over
the past year. For the week, Currency increased $0.9 billion, and Demand &
Checkable Deposits jumped $24.9 billion. Savings Deposits expanded $11.3
billion, while Small Denominated Deposits fell $5.3 billion. Retail Money Funds
sank $16.0 billion.
Total Money Market Fund assets (from Invest Co Inst) were about unchanged at
$3.675 trillion. Money fund assets have declined $155 billion y-t-d, or 8.4%
annualized. Money funds rose $220 billion, or 6.4%, over the past year.
Total Commercial Paper outstanding sank another $47.4 billion this past week to
$1.155 trillion. CP has declined $527 billion y-t-d (65% annualized) and $598
billion over the past year (34%). Asset-backed CP dropped $21.3 billion to $481
billion, with a 52-wk drop of $267 billion (36%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were down $27 billion y-o-y to $6.798 trillion. Reserves have
increased $33 billion year-to-date.
Global Credit Market Dislocation Watch
June 26 - Bloomberg (Gavin Finch): "The cost of borrowing in dollars for three
months in London dropped below 0.6 percent for the first time as central banks
offered cash to financial institutions and signaled interest rates will stay at
record lows ... 'Central banks are still flooding the markets with cash and
that's clearly continuing to ease the strains' said Christoph Rieger…strategist
at Commerzbank ... The Libor-OIS spread, a barometer of the reluctance of banks
to lend, stayed at 38 bps ... down from a peak of 364 bps on Oct. 10."
June 24 - Bloomberg (Gabi Thesing): "The European Central Bank said it will
lend banks 442 billion euros ($621 billion) for 12 months, the most it has ever
allotted in an auction, as it steps up efforts to unblock credit markets in the
16-nation euro region ... The euro interbank offered rate, or Euribor, for
12-month loans fell to 1.57%... a record low."
June 25 - Bloomberg (Dara Doyle and Ian Guider): "Ireland's banks face losses
of as much as 35 billion euros ($49 billion) through next year as the economy
shrinks at an 'unprecedented' pace, the IMF said. GDP will shrink a cumulative
13.5% in the
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