Page 1 of 3 CREDIT BUBBLE BULLETIN Just the facts
Weekly watch by Doug Noland
For the week, the Dow sank 2.9% (down 15.4% y-t-d) and S&P500 fell 3.3%
(down 15.4%). The Transports dropped 4.4% (up 7.0%), and the Morgan Stanley
Cyclical index declined 3.8% (down 15.9%). The "defensive" Morgan Stanley
Consumer index dipped only 0.4% (down 7.1%), while the Utilities sank 6.1%
(down 17%). The broader market joined in the selling. The small cap Russell
2000 declined 2.9% (down 6.2%), and the S&P400 Mid-Caps fell 3.8% (down
8.5%). Tech was hit hard. The NASDAQ100 sank 5.9% (down 15.2%), and the Morgan
Stanley High Tech index dropped 6.3% (down 15.3%). The Semiconductors were
clobbered for 6.5% (down 18.8%), The Street.com Internet Index declined 4.7%
(down 10.7%), and the
NASDAQ Telecommunications index was hammered for 8.6% (down 11.7%). The
Biotechs fell 3.6% (up 2%). The Broker/Dealers dipped 0.6% (down 27.5%), while
the Banks gained 4.1% (down 22.3%). With Bullion sinking $28, the HUI fell
14.3% (down 26.4%).
One-month Treasury bill rates sank 9 bps this week to 1.57%, while 3-month
yields added 4 bps to 1.77%. Two-year government yields declined 6 bps to
2.31%. Five-year T-note yields fell 9 bps to 2.98%, and 10-year yields sank 11
bps to 3.70%. Long-bond yields dropped 12 bps to 4.30%. The 2yr/10yr spread
declined 5 to 139 bps. The implied yield on 3-month December '09 Eurodollars
sank 17 bps to 3.40%. Benchmark Fannie MBS yields dropped 19 bps to 5.63%. The
spread between benchmark MBS and 10-year T-notes narrowed 8 to 193 bps. The
spread on Fannie's 5% 2017 note narrowed one to 77 bps, and the spread on
Freddie's 5% 2017 note narrowed one to 76 bps. The 10-year dollar swap spread
increased 0.5 to 68.25. Corporate bond spreads were mostly wider. An index of
investment grade bond spreads widened 2 to 160 bps, and an index of junk bond
spreads widened 32 bps to 605 bps.
It was another light week of debt issuance. Investment grade issuance this week
included Oncor Electric Delivery $1.5bn, John Deere $1.15bn, CVS Caremark $350
million, Ohio Power $250 million, Spectra Energy $250 million, Oklahoma G&E
$250 million, and Northern States Power $200 million.
I saw no junk or convertible issuance again this week.
International dollar debt issuers this week included KFW $4.0bn and
Interamerica Development Bank $1.0bn.
German 10-year bund yields sank 17 bps to 4.00%. The German DAX equities index
was clobbered for 4.6% (down 24% y-t-d). Japanese 10-year "JGB" yields rose 5.5
bps to 1.46%. The Nikkei 225 dropped 6.6% (down 20.2% y-t-d). Emerging markets
were mostly lower. Brazil's benchmark dollar bond yields rose 5 bps to 5.89%.
Brazil's Bovespa equities index fell 6.7% (down 18.7% y-t-d). The Mexican Bolsa
declined 1.5% (down 12.3% y-t-d). Mexico's 10-year dollar yields fell 6 bps to
5.57%. Russia's RTS equities index was hammered for 10.8% (down 35.9% y-t-d).
India's Sensex equities index rallied 3.1%, lowering y-t-d losses to 28.6%.
China's Shanghai Exchange sank 8.1%, with 2008 losses at 58.1%.
Freddie Mac 30-year fixed mortgage rates fell 5 bps to 6.35% (up 4 bps y-o-y).
Fifteen-year fixed rates declined 3 bps to 5.90% (down 7bps y-o-y), while
one-year ARMs dropped 18 bps to 5.15% (down 41bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates this week down 10
bps to 7.26% (up 20bps y-o-y).
Bank Credit sank $25.9bn to $9.410 TN (week of 8/27). Bank Credit has expanded
$197bn y-t-d, or 3.2% annualized. Bank Credit posted a 52-week rise of $568bn,
or 6.4%. For the week, Securities Credit dropped $13.7bn. Loans & Leases
fell $12.2bn to $6.943 TN (52-wk gain of $457bn, or 7.0%). C&I loans
increased $6.0bn, with y-t-d growth of 7.4%. Real Estate loans declined $3.2bn
(up 2.3% y-t-d). Consumer loans increased $2.6bn, while Securities loans sank
$24.8bn. Other loans increased $7.1bn.
M2 (narrow) "money" supply increased $3.9bn to $7.722 TN (week of 8/25). Narrow
"money" has expanded $259bn y-t-d, or 5.3% annualized, with a y-o-y rise of
$317bn, or 4.3%. For the week, Currency added $0.2bn, and Demand &
Checkable Deposits increased $7.1bn. Savings Deposits increased $0.2bn, and
Small Denominated Deposits gained $3.1bn. Retail Money Funds declined $6.7bn.
Total Money Market Fund assets (from Invest Co Inst) rose $13.0bn to $3.585 TN,
with a y-t-d increase of $472bn, or 22.5% annualized. Money Fund assets have
posted a one-year increase of $784bn (28%).
Asset-Backed Securities (ABS) issuance was light again this week. Year-to-date
total US ABS issuance of $125bn (tallied by JPMorgan's Christopher Flanagan) is
running at 27% of comparable 2007. Home Equity ABS issuance of $303 million
compares with 2007's $219bn. Year-to-date CDO issuance of $21bn compares to the
year ago $219bn.
Total Commercial Paper outstanding rose $9.9bn this week to $1.804 TN, with CP
up $18.8bn y-t-d. Asset-backed CP jumped $19.3bn last week to $778bn, with 2008
now showing an increase to $4.8bn. Over the past year, total CP has contracted
$121bn, or 6.3%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 9/3) declined
$1.0bn to $2.403 TN. "Custody holdings" were up $347bn y-t-d, or 24.4%
annualized, and $424bn y-o-y (21.4%). Federal Reserve Credit jumped $9.5bn to
$894bn. Fed Credit has expanded $20.3bn y-t-d (3.4% annualized) and $37.2bn
y-o-y (4.3%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.228 TN y-o-y, or 21.4%, to $6.959 TN.
Global Credit Market Dislocation Watch
September 7 - Bloomberg (Dawn Kopecki and Alison Vekshin): "Treasury Secretary
Henry Paulson decided to take control of Fannie Mae and Freddie Mac after a
review found the beleaguered mortgage-finance companies used accounting methods
that inflated their capital, according to people with knowledge of the
decision. Morgan Stanley, hired by the Treasury to probe the companies'
finances, concluded the accounting, while legal, enabled Freddie, and to a
lesser extent Fannie, to overstate the value of their reserves, according to
the people who declined to be identified because the findings are confidential.
The Treasury plans to put Fannie and Freddie into a so- called conservatorship
and pump capital into the companies, House Financial Services Committee
Chairman Barney Frank said in an interview yesterday. The government would make
periodic capital injections by buying convertible preferred shares or warrants,
according to a person briefed on the plan. Paulson is seeking to end a crisis
of confidence in the companies sparked by concern the companies didn't have
enough capital to weather the biggest housing slump since the Great Depression.
The Treasury was 'convinced that the markets simply wouldn't respond until
after something like this,' said Frank, who was briefed by Paulson. 'I think
it's an important combination.'"
September 6 - New York Times (Gretchen Morgenson and Charles Duhigg): "The
government's planned takeover of Fannie Mae and Freddie Mac, expected to be
announced on Sunday, came together after advisers poring over the companies'
books for the Treasury Department concluded that Freddie's accounting methods
had overstated its capital cushion, according to regulatory officials briefed
on the matter. The proposal to place both companies, which own or back $5.3
trillion in mortgages, into a government-run conservatorship also grew out of
deep concern among foreign investors that the companies' debt might not be
repaid. Falling home prices, which are expected to lead to more defaults among
the mortgages held or guaranteed by Fannie and Freddie, contributed to the
urgency, regulators said. Investors who own the companies' common and preferred
stock will suffer. Holders of debt, including many foreign central banks, are
expected to receive government backing. Top executives of both companies will
be pushed out, according to those briefed on the plan. The cost of the
government's intervention could rise into tens of billions of dollars and will
probably be among the most expensive rescues ever financed by taxpayers."
September 2 - Bloomberg (Fergal O'Brien and Carol Massar): "The global economic
downturn has only just begun, with the U.S. heading into a recession and the
impact of the credit crunch still to be fully felt, said Stephen Roach, Morgan
Stanley's Asia chairman. 'There's more to this macro event than just the
credit-market contagion itself,' Roach said ... 'Maybe two-thirds of that is
behind us, but the impacts on the real side of the U.S. economy and the global
economy are at an early stage.'"
September 1 - Bloomberg (Ambereen Choudhury): "The pace of mergers and
acquisitions is at the lowest level in four years, even after Commerzbank AG's
$14.4 billion purchase of Dresdner Bank. The Chart of the Day shows $145
billion of deals were announced in August, the lowest amount since September
2004, when $93 billion of deals were disclosed, according to data compiled by
Bloomberg."
September 3 - Bloomberg (Ben Livesey): "U.K. banks may have tapped the Bank of
England's special funding plan for about 200 billion pounds ($354 billion),
according to UBS AG analysts, as wholesale funding markets stay closed. The
central bank in April introduced the so-called special liquidity scheme,
allowing U.K. lenders to swap mortgage-backed securities damaged by the credit
squeeze for government bonds. The window for borrowing closes in October, after
which the central bank will announce how much money has been handed out. 'We
believe the Bank of England is encouraging all eligible players to make full
use of this facility, said ... analysts led by Alastair Ryan ... 'With
securitization markets closed, the banks are incentivized to do just that.'"
September 4 - Bloomberg (John Glover): "Defaults on leveraged loans in Europe
may jump almost fourfold within a year as lenders tighten rules on borrowing
when companies are forced to restructure the debt, Standard & Poor's said
in a report. The
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