Page 2 of 3 CREDIT BUBBLE BULLETIN Washington's guilty sermonizers
Commentary and weekly watch
by Doug Noland
were down 2 bps to 0.90%. Five year T-note yields ended the week 9 bps lower to
1.82%. Ten-year yields dropped 13 bps to 3.87%. Long-bond yields fell 16 bps to
3.56%. The implied yield on 3-month December '09 Eurodollars increased 6 bps to
1.605%. Benchmark Fannie MBS yields sank 20 bps to 4.25%. The spread between
benchmark MBS and 10-year T-notes narrowed 6 to 138 bps. Agency 10-yr debt
spreads widened 12 to 74 bps. The 2-year dollar swap spread increased 8 to 77.5
bps; the 10-year dollar swap spread declined 6 to 25.5bps, and the 30-year swap
spread declined 7.25 to negative 31.75 bps. Corporate bond spreads widened
notably. An index of investment grade bond spreads widened 35 to 280 bps, and
an index of junk spreads
widened 38 to 1,289 bps. GE Capital Credit default swap prices traded above
1,000 bps.
Yet another week of decent corporate debt issuance. Investment grade issuance
included Eli Lilly $2.5 billion, Coca-Cola $2.25bn, State Street $1.5bn,
PG&E $550 million, FLP Group $500 million, Consumers Energy $500 million,
Cargill $450 million, Appalachian Power $350 million, Pitney Bowes $300
million, George Washington University $200 million, and Mississippi Power $125
million.
Junk issuers included Nisource $600 million and Plains Exploration $365
million.
March 6 - Bloomberg (Laura Cochrane): "Emerging-market borrowing costs rose,
heading for the biggest weekly increase in three months ... The extra yield
investors demand to own developing nations' bonds instead of US Treasuries
climbed 3 bps to 6.96 percentage points (up 47bps on the week)…"
International debt issues this week included KFW $4.0bn, International Bank of
Reconstruction and Development $3.0bn, BP Capital $3.25bn, Barclays Bank
$2.35bn, and Swedish Housing Finance $250 million.
U.K. 10-year gilt yields collapsed 56 bps to 3.06%, and German bund yields
dropped 19 bps to 2.92%. The German DAX equities index fell 4.6% (down 23.8%).
Japanese 10-year "JGB" yields added one basis point to 1.28%. The Nikkei 225
sank 5.2% (down 19%). Emerging markets were mixed to lower. Brazil's benchmark
dollar bond yields rose 12 bps to 6.98%. Brazil's Bovespa equities index
declined 2.8% (down 1.2% y-t-d). The Mexican Bolsa dropped 4.0% (down 23.8%
y-t-d). Mexico's 10-year $ yields surged 28 bps to 6.76%. Russia's RTS equities
index rallied 5.8% (down 8.7%). India's Sensex equities index dropped 6.4%
(down 13.7%). China's Shanghai Exchange jumped 5.3% (up 20.4%).
Freddie Mac 30-year fixed mortgage rates rose 8 bps to 5.15% (down 88bps
y-o-y). Fifteen-year fixed rates gained 4 bps to 4.72% (down 75bps y-o-y).
One-year ARMs increased 5 bps to 4.86% (down 8bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 8 bps this week
to 6.91% (down 8bps y-o-y).
Federal Reserve Credit declined $8.8bn last week to $1.891 TN. Fed Credit
expanded $1.018 TN over the past 52 weeks (116%). Elsewhere, Fed Foreign
Holdings of Treasury, Agency Debt last week (ended 3/4) jumped $15.7bn to a
record $2.596 TN. "Custody holdings" were up $446bn over the past year, or 21%.
Bank Credit declined $16.6bn to $9.766 TN (week of 2/25). Bank Credit expanded
$400bn year-over-year, or 4.3%. Bank Credit increased $391bn over the past 25
weeks. For the week, Securities Credit dropped $15.1bn. Loans & Leases
slipped $1.6bn to $7.111 TN (52-wk gain of $220bn, or 3.2%). C&I loans fell
$5.9bn, with 52-wk growth of 7.4%. Real Estate loans gained $2.7bn (up 5.3%
y-o-y). Consumer loans added $2.3bn, while Securities loans declined $1.3bn.
Other loans added $0.5bn.
M2 (narrow) "money" supply declined $5.7bn to $8.275 TN (week of 2/23). Narrow
"money" has now inflated at an 16.7% rate over the past 23 weeks and $719bn
over the past year, or 9.5%. For the week, Currency added $1.2bn, while Demand
& Checkable Deposits dropped $14.6bn. Savings Deposits rose $16.9bn, while
Small Denominated Deposits slipped $0.9bn. Retail Money Funds fell $8.2bn.
Total Money Market Fund assets (from Invest Co Inst) rose $17.7bn to $3.906 TN,
with a 52-wk expansion of $455bn, or 13.2% annualized.
Asset-Backed Securities (ABS) issuance remains about dead. Year-to-date total
US ABS issuance of $2.9bn (tallied by JPMorgan's Christopher Flanagan) is a
fraction of the $34.8bn for comparable 2008. There has been no home equity ABS
issuance in months. Year-to-date CDO issuance totals only $1.2bn.
Total Commercial Paper outstanding sank $44.2bn this past week to a 19-wk low
$1.480 TN. CP has declined $201bn y-t-d (69% annualized) and $380bn over the
past year (20.4%). Asset-backed CP declined $2.0bn to $722bn, with a 52-wk drop
of $95bn (11.6%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $259bn y-o-y, or 4.1%, to $6.661 TN. Reserves have
declined $285bn over the past 20 weeks. Global Credit Market Dislocation Watch
March 4 - Bloomberg (Dan Levy): "More than 8.3 million US mortgage holders owed
more on their loans in the fourth quarter than their property was worth as the
recession cut home values by $2.4 trillion last year, First American CoreLogic
said. An additional 2.2 million borrowers will be underwater if home prices
decline another 5%...Households with negative equity or near it account for a
quarter of all mortgage holders."
March 4 - Wall Street Journal (Liz Rappaport and Jon Hilsenrath): "The US
launched a program to finance up to $1 trillion in new lending to consumers and
businesses, in an ambitious attempt to jump-start credit for everything from
car loans to equipment leases. The Federal Reserve and the Treasury Department
hope to revive the moribund market for so-called securitized lending, which
until last year was central to providing consumer and business loans. Starting
March 17, large investors -- including hedge funds and private-equity firms --
can obtain cheap credit from the Fed and use the money to buy newly issued
securities backed by such loans."
March 3 - Wall Street Journal: "If you missed the first hedge-fund boom, now
may be the time to put up your shingle. Looking at the terms of the Federal
Reserve's new Term Asset-Backed Securities Loan Facility, investors using it
should be able to generate hefty returns with little risk. The TALF effectively
turns the Fed into a generous prime brokerage. The central bank lends money for
up to three years to investment firms to buy bonds backed by assets like auto
or credit-card loans. The Fed needs to lure investors back into the market for
these asset-backed securities, or ABS, where new issuance has almost
disappeared."
March 5 - Wall Street Journal (Michael M. Phillips and Ruth Simon): "The Obama
administration announced details of a housing-rescue plan it said would help as
many as one in nine homeowners, from low-income Americans struggling to avoid
foreclosure to well-off borrowers who owe more than their homes are worth. The
announcement came two weeks after President Barack Obama said he would spend
$75 billion on the housing component of an emergency economic plan that
includes a financial-system bailout and a $787 billion spending-and-tax-cut
package."
March 2 - Bloomberg (Scott Lanman and Hugh Son): "American International Group
Inc ... will get as much as $30 billion in new government capital in a revised
bailout after posting a record fourth-quarter loss. The loss widened to $61.7
billion ... The government will also exchange its $40 billion in preferred
stock for new shares that 'resemble common equity,' the Treasury and Federal
Reserve said. AIG was paying a 10% dividend on the preferred stock."
March 4 - Bloomberg (Shannon D. Harrington): "The cost to protect against a
default by the finance division of General Electric Co. rose for the fourth day
to a record. Traders of contracts protecting against a default by GE Capital
Corp. for five years demanded 20% upfront in addition to 5% a year ... That
means it would cost $2 million initially and $500,000 annually to protect $10
million of the unit's debt."
March 3 - Dow Jones: "US corporate defaults continued to increase through
February, Standard & Poor's said ... as the year-to-date number equaled the
total number of defaults in 2007. Nine companies defaulted in February,
bringing the year-to-date total to 27... S&P also raised its estimate for
the 12-month trailing junk-grade default rate to 5.4% in February, up from
4.66% in January and 1.23% in February 2008."
Currency Watch
The dollar index ended the week 0.6% higher to 88.51 (up 8.9% y-t-d). For the
week on the upside, the Swiss franc increased 0.7%, the Taiwanese dollar 0.5%,
the Brazilian real 0.5% and the New Zealand dollar 0.5%. On the downside, the
South African rand declined 3.1%, the Swedish krona 2.0%, the British pound
1.6%, the South Korean won 1.0%, the Japanese yen 0.8%, and the Canadian dollar
0.8%. The Euro declined 0.2%.
Commodities Watch
March 4 - Bloomberg (Luo Jun and Zhang Dingmin): "China Investment Corp., the
$200 billion sovereign wealth fund, may invest in 'undervalued' commodity
assets, joining other Chinese companies in taking advantage of a seven-year low
in prices. 'Many commodities are undervalued and are among our considerations
for potential investments,' Executive Vice President Jesse Wang told
reporters…"
March 5 - Bloomberg (Helen Yuan): "Chinese steelmakers, the largest buyers of
iron ore, want Cia. Vale do Rio Doce, BHP Billiton Ltd. and Rio Tinto Group to
cut prices of the material by between 40% and 50% this year, Anshan Iron &
Steel Group said."
Gold slipped 0.4% this week to $939 (up 6% y-t-d), and silver added 1.7% to
$13.33 (up 18% y-t-d). April Crude gained $1.04 to $45.80 (up 3% y-t-d). April
Gasoline fell 2.6% (up 26% y-t-d), and April Natural Gas dropped 6.3% (down 30%
y-t-d). March Copper surged 9.8% (up 20% y-t-d). March Wheat rallied 1.1% (down
16% y-t-d), and Corn gained 0.6% (down 13% y-t-d). The CRB index declined 0.9%
(down 8.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) was little
changed (down 3.8% y-t-d).
China Reflation Watch
March 4 - Bloomberg (Li Yanping): "China's budget spending may more than double
over last year's planned expenditure as the government implements its 4
trillion yuan ($585 billion) stimulus package, data given by a spokesman for
the nation's lawmakers show. The government has earmarked 480.7 billion yuan
for defense this year, accounting for 6.3% of total budgetary expenditure, Li
Zhaoxing, spokesman for the National People's Congress…said…"
March 3 - Bloomberg (Jun Luo and Yidi Zhao): "China's budget deficit this year
may be about 3% of gross domestic product, Jia Kang, head of the Insitute of
Fiscal Science at the Ministry of Finance said…"
March 3 - Bloomberg (Li Yanping and Nipa Piboontanasawat): "A Chinese
manufacturing index climbed for a third month, adding to evidence that a 4
trillion yuan ($585 billion) stimulus package is pushing the world's
third-biggest economy closer to a recovery."
Japan Watch
March 5 - Bloomberg (Jason Clenfield): "Japanese companies cut spending last
quarter at the fastest pace in a decade ... Capital spending excluding software
fell 18.1% in the three months ended Dec. 31 from a year earlier…"
March 2 - Bloomberg (Toru Fujioka): "Japan's wage declines accelerated in
January as companies pared production ... Monthly wages, including overtime and
bonuses, fell 1.3% from a year earlier…"
March 2 - Bloomberg (Naoko Fujimura and Tetsuya Komatsu): "Toyota ... and Honda
... led a drop in the country's monthly vehicle sales ... to the lowest level
in 35 years. Sales of cars, trucks and buses, excluding minicars, fell 32% to
218,212 vehicles in February…"
March 3 - Bloomberg (Tetsuya Komatsu and Naoko Fujimura): "Toyota…, forecasting
its first loss in 59 years, is seeking loans
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