Page 2 of 3 CREDIT BUBBLE BULLETIN Inflationism's seductive battle cry
Commentary and weekly watch by Doug Noland
One-month Treasury bill rates ended the week at 13 bps, and three-month bills
closed at 19 bps. Two-year government yields rose 4 bps to 0.85%. Five year
T-note yields jumped 21 bps to 2.19%. Ten-year yields surged a notable 31 bps
to 3.45%. The long-bond saw yields rise 30 bps to 4.38%. The implied yield on
3-month December '09 Eurodollars was unchanged at 0.95%. Benchmark Fannie MBS
yields rose 19 bps to 4.15%. The spread between benchmark MBS and 10-year
T-notes narrowed 12 bps to a skimpy 69 bps. Agency 10-yr debt spreads narrowed
one to 37 bps. The 2-year dollar swap spread declined 1.5 to 40.3 bps; the
10-year dollar swap spread increased 5.4 to 14.4 bps; and the
30-year swap spread increased 11 to negative 30.4 bps. Corporate bond spreads
were mostly tighter. An index of investment grade bond spreads narrowed 11 to
197 bps, and an index of junk spreads tightened 20 to 930 bps.
May 18 - Bloomberg (Lukanyo Mnyanda and Anna Rascouet): "European bonds are
beating Treasuries for the first time in four years ... While the Fed is
spending $300 billion buying Treasuries, part of $12.8 trillion committed by
the US to lift the country out of its deepest recession since the 1930s, the
ECB has committed to buy 60 billion euros ($81 billion) in covered bonds,
securities backed by mortgages and public-sector loans."
The corporate debt issuance boom runs unabated. Investment grade issuers
included ConocoPhilips $5.25bn, Verizon Wireless $4.0bn, Hewlett-Packard
$2.0bn, Berkshire Hathaway $1.0bn, Aflac $850 million, Principal Financial $750
million, Kellogg $750 million, State Street $500 million, Praxair $500 million,
Nordstrom $400 million, PPL Electric Utilities $300 million, Beckman Coulter
$500 million, Gulfstream Natural Gas $300 million, Panhandle Eastern Pipeline
$150 million, and Central Maine Power $150 million.
The strongest week of issuance in in two years put three-week junk issuance at
a record $9.8bn (from Bloomberg). Junk bond funds saw inflows of $306 million
this past week (from AMG). Junk issuers included Warner Music Group $1.1bn,
Power Sector Assets $1.0bn, Apria Healthcare $700 million, Ashland Inc $650
million, Ameristar Casino $650 million, Gibson Energy $560 million, Corrections
Corp $465 million, Berry Petroleum $325 million, Bio-Rad Labs $300 million,
Scientific Games $225 million, Cellu Tissue $255 million, Markwest Energy $150
million, Hughes Network Systems $150 million and Compass Energy $100 million.
Convert issuance this week included Anglogold $730 million.
International dollar debt issuers included Barclays Bank $2.0bn, Westpac
Securities $1.5bn, South Africa $1.5bn, Atlantic Finance $1.25bn, UPC Holding
$400 million and Banco Bilbao $200 million.
May 22 - Bloomberg (Patricia Lui and Garfield Reynolds): "Emerging-market
equity funds, led by China, Brazil, India and Taiwan, attracted most of the
cash that investors have been pulling from money-market funds ... EPFR Global
said. The funds lured a total of $21 billion in the past 11 weeks ... while
Europe, Japan and US saw combined outflows of $14.1 billion…"
UK 10-year gilt yields jumped 19 bps to 3.72%, and German bund yields rose 18
bps to 3.54%. The German DAX equities index jumped 3.8% (up 2.3%). Japanese
10-year "JGB" yields rose slightly to 1.43%. The Nikkei 225 slipped 0.4% (up
4.1%). Emerging markets were solid. Brazil's benchmark dollar bond yields rose
a modest 4 bps to 6.04%. Brazil's Bovespa equities index rallied 3.2% (up 34.7%
y-t-d). The Mexican Bolsa gained 3.2% (up 7.7% y-t-d). Mexico's 10-year $
yields were little changed at 5.94%. Russia's RTS equities index surged 9.0%
(up 61.5%). India's Sensex equities index jumped 14.1% (up 43.9%). China's
Shanghai Exchange declined 1.8% (up 42.7%).
Freddie Mac 30-year fixed mortgage rates dipped 2 bps to 4.82% (down 116bps
y-o-y). Fifteen-year fixed rates declined 2 bps to 4.50% (down 105bps y-o-y).
One-year ARMs jumped 11 bps to 4.82% (down 4bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down a notable 15
bps to 6.22% (down 83bps y-o-y).
Federal Reserve Credit inflated $48.6bn last week to $2.165TN. Fed Credit has
declined $81.4 y-t-d, although it expanded $1.294 TN over the past 52 weeks
(149%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 5/20) surged $25.9bn to a record $2.710 TN. "Custody holdings" have been
expanding at an 20.0% rate y-t-d, and were up $433bn over the past year, or
19.0%.
Bank Credit dropped $34.4bn to $9.754 TN (week of 5/13). Bank Credit was up
$336bn year-over-year, or 3.6%. Bank Credit was down $159bn y-t-d (4.4%
annualized). For the week, Securities Credit gained $6.1bn. Loans & Leases
sank $40.6bn to $7.079 TN (52-wk gain of $183bn, or 2.6%). C&I loans
declined $9.0bn, with one-year growth of 0.8%. Real Estate loans dropped $24bn
(up 6.6% y-o-y). Consumer loans fell $8.4bn, while Securities loans were little
changed. Other loans added $0.6bn.
M2 (narrow) "money" supply increased $8.9bn to $8.313 TN (week of 5/11). Narrow
"money" has expanded at a 3.9% rate y-t-d and 9.0% over the past year. For the
week, Currency added $0.4bn, while Demand & Checkable Deposits dropped
$15.3bn. Savings Deposits surged $39.1bn, while Small Denominated Deposits
declined $5.2bn. Retail Money Funds fell $10.1bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $16bn to $3.774
TN. Money fund assets have declined $56.7bn y-t-d, or 3.9% annualized. Money
funds have expanded $265bn, or 7.5% over the past year.
Total Commercial Paper outstanding fell $14.1bn this past week to $1.284 TN. CP
has declined $397bn y-t-d (61% annualized) and $471bn over the past year
(26.8%). Asset-backed CP sank $25.8bn to $574bn, with a 52-wk drop of $170bn
(22.8%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were down $99bn y-o-y to $6.700 TN. Reserves have declined $245bn
over the past 36 weeks.
Global Credit Market Dislocation Watch
May 21 - Bloomberg (Andrew Frye): "US life insurers, a group led by MetLife
Inc. and Prudential Financial Inc., face 'pain' on more than $300 billion
invested in mortgages tied to commercial property and multifamily homes,
S&P said. 'As the recession rolls on, we believe that there is an
increasing possibility of distress for commercial real estate owners and for
those that hold their mortgages,' said S&P…"
May 20 - Bloomberg (David Mildenberg): "Bank of America Corp., the biggest US
bank by assets, raised about $13.5 billion by selling stock after US regulators
determined it needed more cash to weather an extended recession. Bank of
America issued 1.25 billion shares at an average price of $10.77 each…"
May 21 - Wall Street Journal (Dan Fitzpatrick): "All 10 stress-tested banks
ordered to raise capital by the federal government are well on their way to
plugging their combined $75 billion capital hole, as investors such as
hedge-fund manager John Paulson snap up a fast-growing supply of new shares.
The Treasury Department's move to inject more than $7 billion into GMAC LLC
pushed the total amount of capital raised or being sought through stock and
asset sales ... to $57 billion."
Government Finance Bubble Watch
May 21 - Wall Street Journal (Brian Blackstone): "Federal Reserve officials are
open to raising the amount of Treasury and mortgage-related securities they are
purchasing beyond the $1.75 trillion already committed ... 'Some members noted
that a further increase in the total amount of purchases might well be
warranted at some point to spur a more rapid pace of recovery,' according to
the minutes. The central bank has previously said it would buy as much as $1.45
trillion of mortgage-related securities, as well as $300 billion in longer-term
Treasury securities."
May 21 - Wall Street Journal (Darrell A. Hughes and John D. McKinnon): "The
federal agency that backstops corporate pension plans reported that its deficit
tripled in the last six months, to $33.5 billion."
May 18 - Bloomberg (Joe Mysak): "The National League of Cities says it will ask
the US Treasury today for a $5 billion interest-free loan to capitalize a new
municipal bond insurer it plans to create."
May 20 - Bloomberg (Michael McDonald): "The Federal Reserve will tell a
congressional committee today that it is reluctant to extend guarantees to
California and other municipal market borrowers struggling to sell bonds. The
House Financial Services Committee, chaired by Massachusetts Democrat Barney
Frank, is conducting hearings on four municipal finance bills, including one
that would give the Fed authority to guarantee the repayment of variable-rate
bonds and short-term notes. Another measure would create a public finance
office in the Treasury Department to reinsure $50 billion of municipal bonds
through 2015."
May 21 - Bloomberg (Brian Swint): "Britain had an 8.5 billion-pound ($13.4
billion) budget deficit in April, the most for the month since records began in
1993, and Standard & Poor's ... signaled the country may lose its top
credit rating ... Tax revenue fell 9.5% and spending increased 5.4%."
May 18 - Bloomberg (Zoltan Simon): "The International Monetary Fund and the
European Union approved Hungary's plan for a wider budget deficit this year,
limiting the need for spending cuts. The government now targets a shortfall of
3.9% of gross domestic product, compared with an earlier 2.9% plan…"
Currency Watch
May 18 - Bloomberg (Kevin Hamlin): "China is stockpiling commodities such as
copper and iron ore as part of a reallocation of its sovereign wealth amid
concern that the value of its dollar assets may decline, according to the Royal
Bank of Canada. 'It's part of an overall desire to decrease its exposure to
dollar assets,' said Brian Jackson, senior strategist at Royal Bank of Canada
... China fears the hundreds of billions of dollars the US is spending on bank
bailouts and stimulus will cause 'higher inflation and a weaker dollar,' he
said."
The dollar index was hit for 3.6% this week to 80.05 (down 1.6% y-t-d). For the
week on the upside, the Swedish krona increased 6.2%, the New Zealand dollar
6.1%, the South African rand 5.2%, the Canadian dollar 5.2%, the British pound
4.8%, the Australian dollar 4.6%, the Brazilian real 4.3%, the Euro 3.7%, the
Swiss franc 3.3%, and the Japanese yen 0.4%. On the downside, the dollar gained
about 1% on the Iceland krona and 0.2% on the Argentine peso.
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