Page 1 of 5 CREDIT BUBBLE BULLETIN Just the facts
Commentary and weekly watch by Doug Noland
Global markets regained some composure. Here at home, it was apparently the
biggest one-week market gain since 1974. The Dow jumped 11.3% (down 29.7%
y-t-d) and the S&P500 rose 10.5% (down 34%). The broader market rallied
sharply. The small cap Russell 2000 surged 14.1% (down 29.8%), and the
S&P400 Mid-caps jumped 13.3% (down 33.8%). Economically-sensitive issues
did some recovering. The Morgan Stanley Cyclicals jumped 8.8% (down 46.6%), and
the Transports surged 12.7% (down 15%). The S&P500 Homebuilding index
jumped 33.6% (down 37%), and the Morgan Stanley Retail index rose 19.0% (down
29%). The Utilities increased 5.5% (down 30.7%), and the Morgan Stanley
Consumer index gained 6.5% (down 23.3%). The NASDAQ100 gained 11.0% (down 36%),
and the Morgan Stanley
High Tech index advanced 10.7% (down 39.5%). The Street.com Internet index
increased 12.8% (down 41.3%), the NASDAQ Telecommunications index 12.2% (down
37.5%), and the Semiconductors 12.8% (down 41.3%). The Biotechs rallied 8.8%
(down 14.2%). The financials bounced, with the Broker/Dealers rising 11.0%
(down 56.4%) and the Banks gaining 13.9% (down 33.9%). Although Bullion dropped
$10, the HUI Gold index rallied 14.9% (down 52.6%).
One-month Treasury bill rates dropped to 0.11% and three-month yields sank to
0.44%. At the same time, two-year government yields gained 5 bps to 1.57%.
Five-year T-note yields jumped 26 bps this week to 2.84%, and 10-year yields
rose 28 bps to 3.97%. Long-bond yields surged 30 bps to 4.47%. The 2yr/10yr
spread jumped 21 to 237 bps. The implied yield on 3-month December '09
Eurodollars rose 20 bps to 2.84%. Benchmark Fannie MBS yields increased 32 bps
to 6.04%. The spread between benchmark MBS and 10-year T-notes widened 4 to 207
bps. Agency 10-yr debt spreads increased 4 to a new high 207 bps. The 2-year
dollar swap spread declined 4 to 121.25, while the 10-year dollar swap spread
increased one to 48.25. Corporate bond spreads were mixed. An index of
investment grade bond spreads narrowed 22 to 201 bps, while an index of junk
bond spreads jumped a notable 86 to 928 bps.
Investment-grade debt issuance included Verizon $3.25bn, Coca-Cola Enterprises
$1.0bn, Kimberly-Clark $500 million and Estee Lauder $300 million.
Junk issuers included MGM Mirage $750 million (at 1225 bps over Treasuries!).
I saw no convert or international issuance this week.
October 31 - Bloomberg (Shelley Smith, Abigail Moses and Caroline Hyde):
"Corporate debt markets in Europe endured their worst month on record ...
Investors are demanding the highest yields relative to government debt in a
decade to buy corporate bonds. The cost of credit-default swaps on the Markit
iTraxx Crossover Index surged as high as 925 bps, up from 171 before the crisis
started last year, and a gauge of leveraged loan prices plummeted almost 20%."
German 10-year bund yields jumped 13 bps to 3.875%. The German DAX equities
index surged 17.2% (down 37.6% y-t-d). Japanese 10-year "JGB" yields dipped 2
bps to 1.47%. The Nikkei 225 rallied 12.1% (down 44% y-t-d). Most emerging
markets bounced. Brazil's benchmark dollar bond yields dropped 190 bps to
8.55%. Brazil's Bovespa equities index surged 18.3% (down 41.7% y-t-d). The
Mexican Bolsa rallied 20.4% (down 30.8% y-t-d). Mexico's 10-year $ yields fell
212 bps to 7.58%. Russia's RTS equities index recovered an astonishing 40.8%,
yet still remains down 66.2% for the year. India's Sensex equities index
declined 3.8%, with y-t-d losses boosted to 51.8%. China's Shanghai Exchange
fell another 6.0%, with y-t-d losses of 67.1%.
Freddie Mac 30-year fixed mortgage rates jumped 42 bps to 6.46% (up 20bps
y-o-y), completely reversing last week's drop. Fifteen-year fixed rates surged
47 bps to 6.19% (up 17bps y-o-y) to the high since August 2007. One-year ARMs
increased 15 bps to 5.38% (down 19bps y-o-y). Bankrate's survey of jumbo
mortgage borrowing costs had 30-yr fixed jumbo rates rising 18 bps this week to
7.65% (up 112bps y-o-y).
Bank Credit ballooned $163bn to a record $10.062 TN (week of 10/22), with an
unprecedented seven-week gain of $671bn. Bank Credit has now expanded $850bn
y-t-d, or 11.2% annualized. Bank Credit posted a 52-week rise of $993bn, or
10.9%. For the week, Securities Credit surged $148bn. Loans & Leases jumped
$14.3bn to $7.270 TN (52-wk gain of $595bn, or 8.9%). C&I loans gained
$4.8bn, with y-t-d growth of 13.3%. Real Estate loans slipped $2.7bn (up 6.6%
y-t-d). Consumer loans declined $1.4bn, while Securities loans rose $29.7bn.
Other loans dropped $16.2bn.
M2 (narrow) "money" supply jumped $54.3bn to $7.925 TN (week of 10/20). Narrow
"money" has expanded $463bn y-t-d, or 7.7% annualized, with a y-o-y rise of
$552bn, also 7.5%. For the week, Currency jumped $4.4bn, while Demand &
Checkable Deposits declined $5.8bn. Savings Deposits rose $16.5bn, and Small
Denominated Deposits increased $11.8bn. Retail Money Funds surged $27.3bn.
Total Money Market Fund assets (from Invest Co Inst) increased $1.6bn to $3.538
TN, with a y-t-d expansion of $424bn, or 16.5% annualized. Money Fund assets
have posted a one-year increase of $591bn (20.1%).
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 $229bn. Year-to-date CDO issuance of $30bn
compares to the year ago $298bn.
Total Commercial Paper outstanding surged $100.6bn this week to $1.550 TN (7-wk
decline $266bn), with CP down $236bn y-t-d. Asset-backed CP increased $26.3bn,
with 2008 posting a decline of $51.6bn. Over the past year, total CP has
contracted $333bn, or 17.7%.
Federal Reserve Credit jumped $69.6bn to a record $1.873 TN, with a historic
7-wk increase of $985bn. Fed Credit has expanded $999bn y-t-d (135% annualized)
and $1.01 Trillion y-o-y (117%). Fed Foreign Holdings of Treasury, Agency Debt
last week (ended 10/29) increased $7.5bn to $2.486 TN. "Custody holdings" were
up $430bn y-t-d, or 24.7% annualized, and $454bn y-o-y (22.3%).
Declining again from the previous week, International reserve assets (excluding
gold) - as accumulated by Bloomberg's Alex Tanzi - were nonetheless up $985bn
y-o-y, or 16.7%, to $6.886 TN.
Global Credit Market Dislocation Watch
Oct. 30 - Bloomberg (Sandra Hernandez): "The US government's borrowing needs
will almost double to $2 trillion this fiscal year, prompting the Treasury to
revive three-year notes and hold more frequent sales of 10- and 30-year debt,
according to Goldman Sachs ... The Treasury should consider holding so-called
reopenings of two-year note auctions on a monthly basis because demand for the
maturity is strong enough to support sales of $50 billion to $60 billion a
month, Goldman said…"
October 28 - Dow Jones (Patrick Yoest): "A non-government budget watchdog said
the US budget deficit likely will surpass $1 trillion in fiscal year 2009,
which would catapult the deficit figure into record territory. Maya MacGuineas,
who heads the Committee for a Responsible Federal Budget, said Monday that an
already-high budget imbalance, combined with new spending from bailout measures
and flagging revenue from the economic downturn, made it likely that 'the
budget deficit will in fact reach $1 trillion.' The committee is comprised of
economists and former government officials who favor reining in deficits. 'We
are staring at really troubling, troubling deficits,' MacGuineas said. The
Congressional Budget Office in September predicted that the budget deficit for
fiscal year 2009, which began Oct. 1, would total $438 billion."
Oct. 30 - Bloomberg (Alison Vekshin and Robert Schmidt): "The US Treasury and
the Federal Deposit Insurance Corp. are considering a program that may offer
about $500 billion in guarantees for troubled mortgages to stem record
foreclosures, people familiar with the matter said. The plan, which might put
as many as 3 million homeowners into affordable loans, would require lenders to
restructure mortgages based on a borrower's ability to repay."
October 27 - Bloomberg (Linda Shen and Hugh Son): "At least 18 regional US
banks, including SunTrust Banks Inc. and Capital One Financial Corp., accepted
$35 billion in government cash as the Treasury rolled out the second half of
its $250 billion package…"
October 28 - Bloomberg (Hugh Son and Andrew Frye): "US life insurers are in
talks with the government for potential investments as companies jockey for the
remaining $90 billion of the $250 billion set aside to prop up ailing financial
companies. The Treasury has been 'asking us how we can fit into the program,'
said Jack Dolan, spokesman for the ... American Council of Life Insurers…"
October 28 - Wall Street Journal (Chip Cummins): "Western officials came
knocking on the door of the oil-rich Middle East Tuesday, seeking funds amid
today's global financial crisis. But governments here and their big investment
funds are licking their own wounds from the fallout. US Deputy Treasury
Secretary Robert Kimmitt started a week-long tour of the Persian Gulf ...
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