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5 CREDIT BUBBLE
BULLETIN No
simple repeat of LTCM
fiasco Commentary and market
watch by Doug Noland
current unsustainable
("services-based") economic structure only ensures
greater future credit losses and financial sector
upheaval, along with more problematic economic
dislocation. Importantly, the Fed (vice chairman
Donald L Kohn and chairman Ben Bernanke) made
another major mistake last week downplaying
inflation and dollar risk - focusing instead on
economic risk. Ironically, the Fed is today
impotent with respect to the economy. It had best
start paying attention to the stability of the
currency markets, where it could have some impact.
WEEKLY WATCH Friday's big drop
left the Dow and S&P500 with weekly declines of
0.9%
(down 7.5% y-t-d) and 1.7% (down 9.4%).
Economically-sensitive issues suffered, with the
Transports falling 2.8% (down 0.4%) and the Morgan
Stanley Cyclical index sinking 1.9% (down 7.3%).
The Utilities were smacked for 4.3%, increasing
y-t-d losses to a notable 12.0%. The Morgan
Stanley Consumer index declined 1.5% (down 7.7%).
The small cap Russell 2000 lost 1.3% (down 10.4%),
and the S&P400 Mid-Caps fell 1.6% (down 8.1%).
The NASDAQ100 was hit for 1.6% (down 16.3%) and
the Morgan Stanley High Tech index 1.7% (down
14.9%). The Semiconductors dropped another 1.1%
(down 14.7%). The Street.com Internet Index sank
2.5% (down 12.1%). The NASDAQ Telecom index was
little changed (down 9.4%). The Biotechs bucked
the trend with a 2.1% gain for the week (down
8.2%). Financial stocks were under heavy selling
pressure. The Broker/Dealers were hammered for
5.5% (down 12.5%) and the Banks for 6.4% (down
7.4%). With Bullion up $29 to a new record high,
the HUI gained 4.6% (up 18.7%).
Three-month Treasury bill rates sank 35
bps this past week to 1.84%. Two-year government
yields fell 39 bps to 1.84%. Five-year T-note
yields declined 35 bps to 2.49%, and ten-year
yields fell 29 bps to 3.51%. Long-bond yields
declined 15 bps to 4.42%. The 2yr/10yr spread
ended the week at 187 bps. The implied yield on
3-month December ’08 Eurodollars dropped 35 bps to
2.215%. Benchmark Fannie MBS yields dropped 37 bps
to 5.35%, this week modestly out-performing
Treasuries. The spread between MBS and Treasuries
declined to a still quite wide 183 bps. The spread
on Fannie’s 5% 2017 note was 2 wider at 74 bps and
the spread on Freddie’s 5% 2017 note one wider at
72 bps. The 10-year dollar swap spread declined
3.7 to 71. Corporate bond spreads were mixed but
wide. An index of investment grade bonds spreads
was 2 narrower at 151, and an index of junk bonds
spreads was 6 narrower at 594 bps.
February 29 – Bloomberg (Bryan Keogh and
Gabrielle Coppola): "Hewlett-Packard… led $63.4
billion in bond sales this month as
investment-grade debt posted the worst February
returns in a decade… Sales fell about a third from
a year ago…"
Convert issuance included National Retail
Properties $220 million. International dollar
bond issuance included KFW $3.0bn.
German
10-year bund yields declined 11 bps to 3.89%,
while the DAX equities index fell 0.9% (down 16.4%
y-t-d). Japanese "JGB" yields sank 9.5 bps to
1.355%. The Nikkei 225 rallied 0.8% (down 11.1%
y-t-d and 22.7% y-o-y). Emerging debt and equities
markets were wild, with bond prices going into
melt-up mode at the end of the week. Brazil’s
benchmark dollar bond yields sank 20 bps to 5.62%.
Brazil’s Bovespa equities index declined 1.7%
(down 0.6% y-t-d). The Mexican Bolsa fell 2.1%
(down 2.1 y-t-d). Mexico’s 10-year $ yields sank
24 bps to 5.02%. Russia’s RTS equities index was
little changed (down 9.9% y-t-d). India’s Sensex
equities index recovered 1.3%, reducing y-t-d
declines to 13.4%. China’s Shanghai Exchange
slipped 0.5% this week (down 17.4% y-t-d).
Freddie Mac posted 30-year fixed mortgage
rates jumped 20 bps this week to 6.24%, with rates
up 57 bps in three weeks to the highest level
since November (up 6bps y-o-y). Fifteen-year fixed
rates rose 8 bps to 5.72% (down 20bps y-o-y).
One-year adjustable rates jumped 13 bps to 5.11%
(down 38bps y-o-y).
Bank Credit expanded
$19.5bn during the most recent data week (2/20) to
$9.333 TN. Bank Credit has now posted a 31-week
surge of $690bn (13.4% annualized) and a 52-week
rise of $956bn, or 11.4%. For the week, Securities
Credit fell $15.2bn. Loans & Leases jumped
$34.6bn to a record $6.885 TN (31-wk gain of
$560bn). C&I loans gained $4.3bn, with
one-year growth of 21.4%. Real Estate loans
expanded $12.9bn (up 7.3% y-o-y). Consumer loans
increased $1.9bn. Securities loans jumped $9.7bn,
and Other loans gained $5.9bn. Examining the
liability side, Deposits increased $30.7bn.
M2 (narrow) "money" supply increased
$12.6bn to a record $7.597 TN (week of 2/18).
Narrow "money" expanded $135bn over the past seven
weeks, with a y-o-y rise of $484bn, or 6.8%. For
the week, Currency added $0.2bn, and Demand &
Checkable Deposits increased $3.0bn. Savings
Deposits gained $7.6bn, while Small Denominated
Deposits declined $2.7bn. Retail Money Fund assets
rose $4.5bn.
Total Money Market Fund
assets (from Invest Co Inst) jumped $19.8bn last
week (8-wk gain $315bn) to a record $3.428 TN.
Money Fund assets have posted a 31-week rise of
$844bn (55% annualized) and a one-year increase of
$1,030bn (43%).
Asset-Backed Securities
(ABS) issuance slowed to a paltry $360 million.
Year-to-date total US ABS issuance of $31bn
(tallied by JPMorgan) is running only 26% of the
level from comparable 2007. Home Equity ABS
issuance of $197 million compares to $66bn in
early 2007. Year-to-date CDO issuance of $2.4bn
compares to the year ago $61.4bn.
Total
Commercial Paper jumped $23.5bn to $1.841 TN. CP
has declined $383bn over the past 29 weeks.
Asset-backed CP gained $7.6bn (29-wk drop of
$403bn) to $792bn. Over the past year, total CP
has contracted $170bn, or 8.5%, with ABCP down
$258bn, or 24.6%.
Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 2/27) rose
$11.2bn to a record $2.141 TN. "Custody holdings"
were up $85.0bn y-t-d, or 23.9% annualized, and
$308bn year-over-year (16.8%). Federal Reserve
Credit was little changed at $866.6bn. Fed Credit
has contracted $6.9bn y-t-d, or 4.6% annualized,
while having expanded $13.1bn y-o-y (1.5%).
International reserve assets (excluding
gold) - as accumulated by Bloomberg’s Alex Tanzi –
were up $1.340 TN y-o-y, or 26.7%, to a record
$6.352 TN.
Global Credit Market
Dislocation Watch February 29 – Bloomberg
(Abigail Moses): "Credit markets headed for the
worst two months on record amid investor concern
that mounting losses on securities linked to home
loans will trigger bank failures, according to
traders of credit-default swaps. Contracts on the
benchmark Markit iTraxx Europe index jumped 14.25
basis points to 127.5… more than double the 50
basis points at the start of the year… The CDX
North America Investment Grade index rose the most
in one day yesterday, soaring 14.5 to 153.5."
February 28 – Financial Times: "Investors
must be feeling a little like Hercules. Each time
they chop off one of the Hydra’s heads threatening
the markets, another pops up. Last year investors
obsessed over leveraged loans and their ability to
destabilise bank balance sheets. The threat of big
writedowns evaporated for a while; market
dislocations did not. In another example,
structured investment vehicles took centre stage.
The Treasury even tried to broker a bail-out. The
issue eventually fizzled but market instability
did not. The same probably applies to the
monolines. The obscure bond insurers have become
an obsession with investors, with markets moving
wildly on news related to a bail-out. But even if
their ratings are stabilised, it is unlikely to
mark a sudden end to the credit crisis. Two huge
forces remain at work: a slumping US real estate
market and repricing of credit."
February
29 – Bloomberg (Abigail Moses): "Financial firms
are likely to face at least $600 billion of losses
from the financial crisis, UBS AG analysts said…
Financial institutions have written down or lost
about $160 billion so far."
February 29 –
Bloomberg (Hugh Son): "American International
Group Inc. said the head of its financial products
unit, Joseph Cassano, is stepping down after the
insurer reported $11.1 billion in losses on
contracts sold to fixed-income investors. Cassano
co-founded the unit in 1987 and built it into a
business providing financial guarantees on more
than $500 billion of assets at year-end, including
$61.4 billion in securities tied to subprime
mortgages."
February 29 – MarketWatch
(Alistair Barr): "Hedge funds that trade municipal
bonds have been hit by margin calls in recent days
and some are having to sell positions to meet
those obligations, according to a leading investor
in the market… The disruptions have encouraged
banks and brokers that lend money to muni hedge
funds to pullback and impose more margin calls…
‘The market is in further disarray the last two
days as a number of muni hedge funds are being
forced to liquidate to meet margin calls,’ Mark
McCray, head of muni bonds at Pimco, said. ‘The
widening of munis versus Treasurys has been a
negative and broker dealers have upped their
margin requirements for hedge funds. As such these
funds are trying to liquidate into this
illiquidity.’"
February 29 – Bloomberg
(Jeremy R. Cooke): "U.S. municipal bonds are
headed for their worst month in more than four
years after collapsing demand for securities with
rates set at periodic auctions sent debt costs for
state taxpayers and hospitals as high as 20%...
State and local government bonds fell 4.17%
through yesterday…"
February 28 –
Bloomberg (Michael Quint): "Local government
officials from New York to Houston who followed
the advice of their bankers and issued
auction-rate bonds in combination with
interest-rate swaps are now getting squeezed by
both. States,
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