Page 2 of 3 CREDIT BUBBLE BULLETIN Bubble hazards mount
Commentary and weekly watch by Doug Noland
spreads narrowed 6 bps to 164 (2009 low), and an index of junk spreads narrowed
13 to 822 bps.
Investment grade issuers included CitiBank $5.0 billion, Northrop Grumman $850
million, Nexen $1.0bn, and Colgate Palmolive $300 million.
Junk bond fund inflows were strong again at $531 million (from AMG). The list
of junk issuers included Ford Motor Credit $1.75 TN, HCA $1.25bn, Capital One
$1.0bn, Arch Coal $600 million, Peninsula Gaming $545 million, Pinnacle
Entertainment $450 million, Jabil Circuit $312 million, Duane Reade $300
million, USG
$300 million, American Airlines $275 million, and Great Atlantic & Pacific
$260 million.
I saw no converts issued this week.
International dollar debt issuers included ANZ National $2.2bn, Macquarie Group
$1.0bn, Brazil $500 million, Woori Bank $500 million, and Corporativo Javer
$180 million.
U.K. 10-year gilt yields sank 16 bps to 3.80%, and German bund yields dropped
18 bps to 3.30%. The German DAX equities index gained 2.0% (up 10.9%). Japanese
10-year "JGB" yields increased 3 bps to 1.41%. The Nikkei 225 surged 4.1% (up
16.9%). For the most part emerging markets remained strong. Brazil's benchmark
dollar bond yields dropped 12 bps to 5.61%. Brazil's Bovespa equities index
increased 0.7% (up 45.8% y-t-d). The Mexican Bolsa rose 1.5% (up 20.8% y-t-d).
Mexico's 10-year $ yields rose 14 bps to 5.77%. Russia's RTS equities index was
about unchanged (up 60.3%). India's Sensex equities index gained 1.9% (up
62.4%). China's Shanghai Exchange added 1.2%, increasing 2009 gains to 87.4%.
Freddie Mac 30-year fixed mortgage rates rose 5 bps to 5.25% (down 127bps
y-o-y). Fifteen-year fixed rates added one basis point to 4.69% (down 138bps
y-o-y). One-year ARMs added 3 bps to 4.80% (down 47bps y-o-y). Bankrate's
survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 2 bps
to 6.36% (down 120bps y-o-y).
Federal Reserve Credit slipped $0.6bn last week to $2.010 TN. Fed Credit has
declined $236bn y-t-d, although it expanded $1.117 TN over the past 52 weeks
(125%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week
(ended 7/29) jumped $6.2bn to a record $2.793 TN. "Custody holdings" have been
expanding at a 19.1% rate y-t-d, and were up $425bn over the past year, or
18.0%.
M2 (narrow) "money" supply rose $8.9bn to $8.343 TN (week of 7/20). Narrow
"money" has expanded at a 3.2% rate y-t-d and 8.2% over the past year. For the
week, Currency gained $2.3bn, while Demand & Checkable Deposits dropped
$15.1bn. Savings Deposits surged $37.9bn, while Small Denominated Deposits
declined $5.6bn. Retail Money Funds fell $10.5bn.
Total Money Market Fund assets (from Invest Co Inst) declined $22.0bn to $3.634
TN (low since November). Money fund assets have declined $196bn y-t-d, or 8.9%
annualized. Money funds expanded $132bn, or 3.8%, over the past year.
Total Commercial Paper outstanding dropped $27.6bn to $1.066 TN. CP has
declined $616bn y-t-d (64% annualized) and $662bn over the past year (38%).
Asset-backed CP was little changed at $437.8bn, with a 52-wk drop of $306bn
(41%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $31bn y-o-y to a record $7.025 TN. Reserves have now
increased $260bn year-to-date.
Global Credit Market Watch
July 28 - Bloomberg (Anna Rascouet): "The Libor-OIS spread, a gauge of banks'
reluctance to lend, dropped below 30 bps for the first time in 18 months,
adding to evidence that the two-year freeze in credit markets is thawing."
July 29 - Bloomberg (Jennifer Ryan): "U.K. mortgage approvals climbed to a
14-month high in June, adding to signs the housing market is recovering as the
recession eases and banks become more willing to lend."
Government Finance Bubble Watch
July 29 - Bloomberg (Hui-yong Yu and Sarah Mulholland): "Commercial property
companies may sell about $3 billion of mortgage-backed bonds starting in
September as part of the US program to revive lending for shopping malls,
skyscrapers and hotels. More than a dozen real estate investment trusts are
likely to participate in the Federal Reserve's Term Asset-Backed Securities
Loan Facility, or TALF ... "
July 29 - Bloomberg (Elizabeth Stanton): "PennyMac Mortgage Investment Trust,
which plans to raise $400 million in a stock offering today, is betting that
the people who helped create the housing crisis will know how to profit from
the cleanup. Chief Executive Officer Stanford L. Kurland ... was president and
chief operating officer of Countrywide ... whose co-founder, Angelo Mozilo, was
sued by the Securities and Exchange Commission. Ten other senior officials also
worked at Countrywide, whose subprime loans have suffered from a 39%
delinquency rate ... "
July 29 - Bloomberg (Kateryna Choursina): "Ukraine expects to receive a $3.3
billion loan installment from the International Monetary Fund by the end of the
week that will 'fully balance' the country's finances, Prime Minister Yulia
Timoshenko said. The money is the third tranche under an agreement that calls
for a total of $16.4 billion in loans ... "
July 30 - Bloomberg (Adam Brown): "Romania's government said it will ask the
International Monetary Fund to allow it to widen its budget deficit limit for
2009 to make up for dwindling revenue. The Balkan nation, which has agreed to a
budget-gap ceiling of 4.6% of gross domestic product this year, is holding
talks with the IMF this week ... "
July 28 - Bloomberg (Emma Ross-Thomas): "Spain's central government posted the
largest first-half budget deficit in at least nine years ... The central
government had a deficit of ... ($55.1 billion) in the first half ... or 3.64%
of gross domestic product ... "
July 27 - Bloomberg (Paul Abelsky): "Russia may borrow 1.61 trillion rubles
($52 billion) on the domestic and international capital markets next year to
cover part of a 3.19 trillion-ruble budget deficit, Vedomosti reported."
Currency Watch
July 28 - Bloomberg (Rob Delaney and Rebecca Christie): "Treasury Secretary
Timothy Geithner pledged to rein in the US deficit as China underscored concern
about preserving the value of its $801.5 billion of Treasury holdings. The US
will ensure a 'sustainable' deficit by 2013, Geithner said ... China is
'concerned about the security of our financial assets,' Assistant Finance
Minister Zhu Guangyao said."
July 27 - Market News International (Denny Gulino): "The Federal Reserve agrees
with Treasury's 'strong dollar' policy and the way to get there is to have a
strong economy, Fed Chairman Ben Bernanke said in a PBS network special ... The
Sunday night videotaping showed a contained and unflustered Bernanke
enthusiastically answering questions... 'As far as the Fed and the dollar is
concerned, the Fed supports the Treasury's strong-dollar policy. We think the
dollar should be strong. And the best way we think to get a strong dollar is to
get a strong economy. When the economy's strong then there's a lot of good
investment opportunities, foreigners want to invest here, and that causes the
dollar to rise.'"
The dollar index declined 0.6% this week to a 2009 low 78.31. For the week on
the upside, the Swedish krona increased 3.9%, the Australian dollar 2.2%, the
Norwegian krone 1.9%, the South Korean won 1.7%, the British pound 1.7%, the
Brazilian real 1.7%, the euro 0.4%, the Swiss franc 0.3%, and the Japanese yen
0.1%. On the downside, the South African rand declined 0.2% and the Taiwanese
dollar 0.1%.
Commodities Watch
July 28 - Bloomberg (Thomas Kutty Abraham): "Raw sugar prices may reach a
28-year high in the next six months as a production shortfall in India, the
world's biggest user, worsens a global deficit for a second year, the nation's
largest producer said."
Gold ended the week up 0.2% to $953 (up 8.1% y-t-d). Silver added 0.3% to
$13.92 (up 23.2% y-t-d). August Crude gained $1.00 to $69.05 (up 5% y-t-d).
August Gasoline jumped 6.7% (up 92% y-t-d), while September Natural Gas fell
5.3% (down 35% y-t-d). September Copper jumped 4.0% (up 86% y-t-d). September
Wheat rallied 2.3% (down 13% y-t-d), and August Corn surged 7.4% (down 17%
y-t-d). The CRB index increased 2.2% (up 12.2% y-t-d). The Goldman Sachs
Commodities Index (GSCI) rose 2.1% (up 31% y-t-d).
China Reflation Watch
July 27 - Financial Times (Jamil Anderlini): "Chinese regulators ... ordered
banks to ensure unprecedented volumes of new loans are channelled into the real
economy and not diverted into equity or real estate markets where officials say
fresh asset bubbles are forming. The new policy requires banks to monitor how
their loans are spent and comes amid warnings that banks ignored basic lending
standards in the first half of this year as they rushed to extend Rmb7,370bn in
new loans, more than twice the amount lent in the same period a year earlier.
Beijing's concerns are echoed in other countries across the region, most
notably South Korea, where the government says it is taking steps to cool a
real estate bubble, and Vietnam, where the government has ordered state banks
to cap new lending to head off inflation. The situation in much of Asia is very
different from most Western economies, where governments have flooded the
financial system with liquidity to encourage unwilling banks to lend more."
July 30 - Bloomberg (Chia-Peck Wong): "Home prices in China will rise 20% by
the end of 2010, boosted by economic growth and loans to property developers,
UBS analyst Eric Wong told reporters..."
July 27 - China Knowledge: "China's power generation declined 1.7% to 1.64
trillion kilowatt hours in the first half of this year ... In June, power
generation rose 5.2% year on year, ending a string of eight consecutive monthly
drops."
July 29 - Bloomberg: "China State Construction Engineering Corp. jumped 56% on
its first trading day in Shanghai as confidence in the nation's economic
recovery stoked demand for the world's largest initial public offering in 16
months."
July 31 - Bloomberg (Michael Patterson): "The value of shares traded in China
surpassed the combined amount in the US, U.K. and Japan for the first time on
record, a sign of 'speculative mania' among investors who pushed the Shanghai
Composite Index up 82% this year, according to Grantham Mayo Van Otterloo &
Co.'s Edward Chancellor."
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
