Page 2 of 5 CREDIT BUBBLE BULLETIN History's biggest margin call
Commentary and weekly watch by Doug Noland
I saw no junk, convert or international issuance this week.
It was chaotic. German 10-year bund yields dropped 26 bps to 3.75%. The German
DAX equities index sank 10.2% (down 46.8% y-t-d). Japanese 10-year "JGB" yields
declined 9 bps to 1.49%. The Nikkei 225 was hammered for 12.0% (down 50%
y-t-d), and today trades at about the same level as where it began 1982.
Emerging markets were in many cases destroyed. Brazil's benchmark dollar bond
yields surged 97 bps to 9.92%. Brazil's Bovespa equities index was walloped for
13.5% (down 50.7% y-t-d). The Mexican Bolsa sank 16.4% (down 42.5% y-t-d).
Mexico's 10-year $ yields surged an astonishing 176 bps to 9.76%. Russia's RTS
equities index dropped 17.7%, with y-t-d gains now
at 76.0%. India's Sensex equities index sank 12.8%, with y-t-d losses rising to
57.1%. China's Shanghai Exchange fell 4.7%, boosting y-t-d losses to 65.0%.
Freddie Mac 30-year fixed mortgage rates dropped 42 bps to 6.4% (down 29bps
y-o-y). Fifteen-year fixed rates also dropped 42 bps, to 5.72% (down 27bps
y-o-y), while one-year ARMs rose 7 bps to 5.23% (down 43 bps y-o-y). Bankrate's
survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 15
bps this week to 7.47% (up 88bps y-o-y).
Bank Credit jumped $38.6bn to a record $9.915 TN (week of 10/15), with a 6-wk
gain of $522bn. Bank Credit has now expanded $702bn y-t-d, or 9.4% annualized.
Bank Credit posted a 52-week rise of $889bn, or 9.8%. For the week, Securities
Credit declined $14.9bn. Loans & Leases surged $53.5bn to $7.270 TN (52-wk
gain of $608bn, or 9.1%). C&I loans increased $7.9bn, with y-t-d growth of
13.2%. Real Estate loans rose $8.7bn (up 6.8% y-t-d). Consumer loans gained
$7.5bn, while Securities loans dropped $32.1bn. Other loans surged $61.5bn.
M2 (narrow) "money" supply jumped $43.6bn to $7.870 TN (week of 10/13). Narrow
"money" has expanded $408bn y-t-d, or 6.9% annualized, with a y-o-y rise of
$508bn, also 6.9%. For the week, Currency rose $4.5bn, while Demand &
Checkable Deposits fell $12.6bn. Savings Deposits jumped $21.7bn, while Small
Denominated Deposits rose $16.6bn. Retail Money Funds jumped $13.4bn.
Total Money Market Fund assets (from Invest Co Inst) increased $17.5bn to
$3.536 TN, with a y-t-d expansion of $423bn, or 16.8% annualized. Money Fund
assets have posted a one-year increase of $566bn (19.1%).
The Asset-Backed Securities (ABS) market remains essentially shut down.
Year-to-date total US ABS issuance of $129bn (tallied by JPMorgan's Christopher
Flanagan) is running at 25% of comparable 2007. Home Equity ABS issuance of
$351 million compares with 2007's $228bn. Year-to-date CDO issuance of $24bn
compares to the year ago $290bn.
Total Commercial Paper outstanding sank $61.5bn this week to $1.449 TN (6-wk
decline $366bn), with CP down $336bn y-t-d. Asset-backed CP dropped $12.6bn,
with 2008 posting a decline of $78bn. Over the past year, total CP has
contracted $423bn, or 22.6%.
Federal Reserve Credit expanded another $63.2bn to a record $1.803 TN, with a
historic 6-wk increase of $915bn. Fed Credit has expanded $930bn y-t-d (129%
annualized) and $944bn y-o-y (110%). Fed Foreign Holdings of Treasury, Agency
Debt last week (ended 10/22) declined $7.6bn to $2.479 TN. "Custody holdings"
were up $422bn y-t-d, or 25% annualized, and $448bn y-o-y (22%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.033 TN y-o-y, or 18%, to $6.921 TN.
Global Credit Market Dislocation Watch
October 22 - Bloomberg (Anthony Massucci): "Opaque financial instruments in the
US have created an 'unprecedented' financial crisis that needs to be repaired
by rebuilding the banking system, said former Federal Reserve Chairman Paul
Volcker. 'We are really going to have to rebuild this system from the ground
up. The system is rebuilding itself.'"
October 24 - Financial Times (Chris Hughes and Kate Burgess): "The survival of
a raft of hedge funds is being threatened by fresh pressure to stump up more
collateral for trades made in a range of illiquid assets. So-called prime
brokers, who provide a range of services to hedge funds, are imposing tougher
conditions on their clients and charging more for financing following the
collapse of Lehman ... , raising fears that more funds face collapse. The more
conservative terms mean that a hedge fund would have to put up additional
collateral against financing if markets fall further or sell down its holdings.
The problem for many hedge funds is that they have already sold down their more
liquid investments and are grappling with a wave of redemptions from their own
investors. Further collateral requests or higher financing costs may push many
hedge funds over the edge. One fund manager said: 'Funding is being withdrawn
by prime brokers and funding rates have risen sharply in the past week or two.
A tough environment is just getting tougher.'"
October 22 - Bloomberg (Neil Unmack, Abigail Moses and Shannon D. Harrington):
"Investors are taking losses of up to 90% in the $1.2 trillion market for
collateralized debt obligations tied to corporate credit as the failures of
Lehman ... and Icelandic banks send shockwaves through the global financial
system. The losses among banks, insurers and money managers may spark the next
round of writedowns on CDOs after $660 billion in subprime-related losses ...
Some synthetic CDOs, tied to credit-default swaps on corporate bonds, are
trading at less than 10 cents on the dollar, according to Sivan Mahadevan, a
derivatives strategist at Morgan Stanley in New York."
October 20 - Wall Street Journal (Neil Shah): "A recent rash of bank failures
is wreaking havoc on a large but little-known corner of the credit markets ...
Even as some lending markets begin to recover from last month's demise of
Lehman Brothers ... , the securities firm's default - together with those of
other US and European banks - is causing new dislocations in the
multitrillion-dollar market for complex investments known as synthetic
collateralized debt obligations ... Many synthetic CDOs contain a heavy dose of
exposure to financial companies, including Lehman, US thrift Washington Mutual
Inc. and recently nationalized Icelandic banks Glitnir Bank hf, Kaupthing Bank
hf and Landsbanki Islands hf."
October 23 - Bloomberg (Liz Capo McCormick): "Failures to deliver or receive
Treasuries in the $7 trillion-a-day market for borrowing and lending securities
rose to a record last week even after the Treasury Department re-opened past
bond issues and increased sales to reduce shortages ... Failures, an indication
of scarcity, rose to $5.061 trillion in the week ended Oct. 15, up from $4.767
trillion the prior week ... Failures averaged $195 billion per week through
1990."
October 24 - Bloomberg (Shannon D. Harrington and Michael Shanahan): "The cost
of protecting corporate bonds from default surged to a record as a global asset
sell-off pushed US stocks lower and sent commodities markets falling.
Credit-default swaps protecting against a default by companies including Bayer
AG, Germany's largest drugmaker, French automaker PSA Peugeot Citroen and US
newspaper publisher New York Times Co., soared to records. A benchmark European
index climbed above 900 basis points for the first time as the U.K. economy
shrank more than forecast."
October 23 - Bloomberg (Denis Maternovsky and Laura Cochrane): "Developing
nations' borrowing costs jumped to the highest in six years as Belarus joined
governments seeking a bailout from the International Monetary Fund ... The
extra yield investors demand to own emerging-market government bonds instead of
US Treasuries rose 25 bps to 8.27 percentage points ... Ex-Soviet Belarus
followed Iceland, Pakistan, Hungary and Ukraine in requesting emergency loans
as the global financial crisis limits its ability to borrow, the IMF said ... "
October 23 - Bloomberg (Hugh Son): "American International Group Inc., the
insurer bailed out by the US , may need to borrow more than the $122.8 billion
already offered by the government if capital markets don't improve, said CEO
Edward Liddy."
October 22 - Bloomberg (William Selway): "The California Public Employees'
Retirement System, the largest US public pension fund, may force state and
local governments to pay more for retirement benefits because of losses
suffered in the stock market's slide. The fund lost more than 20% of its value
since July 1, the beginning of its fiscal year. Should those losses be
sustained until the end of June, the fund may need to raise employer
contributions by 2% to 4% as soon as July 2010, according to an actuarial
report."
October 23 - Bloomberg (David Wilson): "Companies in the S&P 500 Index will
end the year with their worst cumulative pension-fund deficit, according to
Howard Silverblatt, an analyst at S&P. Even a 50% advance in the index from
now until year-end wouldn't prevent the shortfall from exceeding the record of
$218.5 billion, set in 2002, Silverblatt said ... Companies 'will have to put
in additional cash' to make up the difference, he said."
October 21 - Bloomberg (Gabrielle Coppola): "The default rate for high-yield,
high-risk corporate borrowers may reach 7.6% in the next 12 months ...
according to S&P. The share of junk-rated debt trading at distressed levels
jumped to 53% as of Oct. 15, the
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