Page 2 of 3 CREDIT BUBBLE BULLETIN From bear to bear
Commentary and weekly watch by Doug Noland
WEEKLY WATCH
For the week, the S&P500 declined 2.2% (up 15.6% y-t-d), and the Dow gave
back 1.6% (up 10.1% y-t-d). The Morgan Stanley Consumer index dipped 1.1% (up
14.8%), and the Utilities declined 1.5% (down 0.5%). The Morgan Stanley
Cyclicals sank 4.4% (up 51.4%), and Transports dropped 4.3% (up 7.7%). The
Banks fell 3.3% (up 4.1%), and the Broker/Dealers dropped 3.4% (up 48.7%). The
broader market pulled back. The S&P 400 Mid-Caps lost 3.3% (up 26.0%), and
the small cap Russell 2000 fell 3.1% (up 19.9%). The Nasdaq100 declined 1.8%
(up 39.8%) and the Morgan Stanley High Tech index fell 2.8% (up 53.8%). The
Semiconductors declined 1.7% (up 51.3%). The InteractiveWeek Internet index
declined 1.5% (up 60.5%). The Biotechs dropped
3.1% (up 43.2%). With Bullion down $16.75, the HUI gold index sank 6.2% (up
31.5%).
One-month Treasury bill rates ended the week at 2 bps, and three-month bills
closed at 10 bps. Two-year government yields fell 7 bps to 0.87%. Five-year
T-note yields sank 12 bps to 2.30%. Ten-year yields were 14 bps lower to 3.32%.
Long bond yields dropped 11 bps to 4.10%. Benchmark Fannie MBS yields fell 12
bps to 4.27%. The spread between 10-year Treasuries and benchmark MBS widened 2
to 95. Agency 10-yr debt spreads narrowed 3 to 13 bps. The implied yield on
December 2010 eurodollar futures declined 10.5 bps to 1.765%. The 2-year dollar
swap spread declined 4.75 to 32 bps; the 10-year dollar swap spread narrowed 4
to 16 bps; and the 30-year swap spread declined 2.25 to negative 11.75 bps.
Corporate bond spreads continue their collapse. An index of investment grade
bond spreads bps to a 16-month low 133, and an index of junk spreads narrowed
23 to 635 bps.
Corporate debt issuance is booming. Investment grade issuers included Wells
Fargo $2.0bn, Enterprise Products $1.1bn, Potash $1.0bn, Burlington Northern
$750 million, Jefferies Group $700 million, Allegheny Energy $600 million, Ohio
Power $500 million, Niagara Mohawk $500 million, Kroger $500 million, Thomson
Reuters $500 million, BB&T $500 million, Private Export Funding $400
million, Unum Group $350 million, Willis North America $300 million, Cabot Corp
$300 million, Arrow Electronics $300 million, GATX $300 million and Viacom $250
million.
Junk bond funds enjoyed inflows of $283 million (from AMG). Junk issuers
included Delta Airlines $1.35bn, QVC $1.0bn, Acco Brands $460 million, American
Airlines $450 million, Dish $400 million, Geoeye $400 million, Spirit
Aerosystems $350 million, Developers Diversified $300 million, Seacor Holdings
$250 million, Brandywine $250 million, North American Energy $205 million,
Nebraska Book $200 million and Inverness Medical $100 million.
Convert issuance included Incyte $350 million.
International dollar-denominated debt issuance remained strong. Issuers
included Mexico $5.5bn, EDP Finance $1.0bn, African Development Bank $1.0bn,
Total Capital $1.0bn, Finance for Danish Investment $800 million, Banco
Bradesco $750 million, Eurasian Development Bank $500 million, Uruguay $500
million, Arcos Dorados $450 million, and Holcim Capital $1.0bn.
U.K. 10-year gilt yields sank 13 bps to 3.61%, and German bund yields fell 12
bps to 3.26%. The German DAX equities index slid 2.3% (up 16.2%). Japanese
10-year "JGB" yields declined 3 bps to 1.31%. The Nikkei 225 fell 1.0% (up
15.9%). Emerging markets were mostly on the defensive. Russia's RTS equities
index declined 1.6% (up 93.9%). India's Sensex equities was unchanged (up
73.0%). China's Shanghai Exchange sank 4.2%, lowering 2009 gains to 55.9%.
Brazil's benchmark dollar bond yields rose 6 bps to 5.12%. Brazil's Bovespa
equities index slipped only 0.6% (up 60.7% y-t-d). The Mexican Bolsa sank 3.9%
(up 28.5% y-t-d). Mexico's 10-year $ yields rose 12 bps to 5.28%.
Freddie Mac 30-year fixed mortgage rates were unchanged at 5.04% (down 105bps
y-o-y). Fifteen-year fixed rates dipped one basis point to 4.46% (down 131bps
y-o-y). One-year ARMs dropped 6 bps to 4.52% (down 64bps y-o-y). Bankrate's
survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down one
basis point to 6.17% (down 101bps y-o-y).
Federal Reserve Credit jumped $44.1bn last week to a 17-wk high $2.133 TN. Fed
Credit has declined $114bn y-t-d, although it expanded $998bn over the past 52
weeks (88%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past
week (ended 9/23) increased $11.6bn to a record $2.854 TN. "Custody holdings"
have expanded at an 18.4% rate y-t-d, and were up $432bn over the past year, or
17.9%.
M2 (narrow) "money" supply slipped $3.9bn to $8.303 TN (week of 9/14). Narrow
"money" has expanded at a 1.9% rate y-t-d and 7.6% over the past year. For the
week, Currency added $0.7bn, and Demand & Checkable Deposits increased
$1.2bn. Savings Deposits rose $10.3bn, while Small Denominated Deposits fell
$13.1bn. Retail Money Funds declined $2.9bn.
Total Money Market Fund assets (from Invest Co Inst) were little changed at
$3.483 TN. Money fund assets have declined $350bn y-t-d, or 12.4% annualized.
Money funds increased $85bn, or 2.5%, over the past year.
Total Commercial Paper outstanding jumped another $22.5bn (6-wk gain of $138bn)
to a 15-wk high $1.212 TN. CP has declined $469bn y-t-d (38% annualized) and
$490bn over the past year (29%). Asset-backed CP rose $19.3bn to $521bn, with a
52-wk drop of $233bn (31%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $285bn y-o-y to $7.211 TN. Reserves have increased $446bn
year-to-date.
Global Credit Market Watch
September 25 - Bloomberg (Jody Shenn): "Cash continues to pour into bond funds
... according to Bank of America Corp. analysts. About $295 billion has been
added this year to funds targeting debt including corporate bonds, bank loans
and municipal notes ... Net outflows from equity funds have been trimmed to $31
billion, from $77 billion in April."
September 23 - Dow Jones (Stan Rosenberg): "California ... completed its sale
of $8.8 billion in revenue anticipation notes meant mainly to help meet the
state's cash flow needs for the balance of its current fiscal year. Pricing
terms remained unchanged from levels set Tuesday in an order period for
individual investors at yields of 1.25% for notes coming due next May and 1.5%
for June securities."
September 24 - Bloomberg (Katrina Nicholas): "Junk bond sales in Asia will
register robust growth as investor appetite for riskier debt increases and
companies turn attention toward 2010 financing requirements, according to
Nomura Holdings Inc. Issuance of junk, or high yield, securities in the region
will follow a resurgence in US and European sales, Glenn Schiffman ... said ...
‘High yield in Asia is about to come back strongly,' Schiffman said ... Junk
bond sales in the US total $99 billion this year, a 63 percent increase on the
same period in 2008."
Government Finance Bubble Watch
September 25 - Bloomberg (Mark Pittman and Bob Ivry): "The Federal Reserve
decided to keep pumping $1.25 trillion of new money into the mortgage market to
focus on rescuing the US economy as the financial system revives and banks ask
for less help ... The US has lent, spent or guaranteed $11.6 trillion to
bolster banks and fight the longest recession in 70 years, according to data
compiled by Bloomberg."
September 22 - New York Times (Stephen Labaton): "Tired of the government
bailing out banks? Get ready for this: officials may soon ask banks to bail out
the government. Senior regulators say they are seriously considering a plan to
have the nation's healthy banks lend billions of dollars to rescue the
insurance fund that protects bank depositors ... The plan, strongly supported
by bankers and their lobbyists, would be a major reversal of fortune ... 'It's
a nice irony,' said Karen Shaw Petrou, managing partner of Federal Financial
Analytics ... 'Like so much of this crisis, this is an issue that involves the
least worst options.'"
September 23 - Bloomberg (Sandrine Rastello): "International Monetary Fund
Managing Director Dominique Strauss-Kahn called on leaders from the Group of 20
nations to maintain efforts to pull the world economy out of a recession,
warning that the crisis isn't over. 'This recovery will be rather sluggish, at
an average lower than growth we had before the crisis,' Strauss-Kahn said ...
'It's too early to say the crisis is behind us.'"
September 25 - Bloomberg (Lee J. Miller and Marco Babic): "With China poised to
surpass Japan as the second-largest economy, the decision by world leaders to
make the Group of 20 nations the main forum for global economic coordination
instead of the G-8 reflects the increasing power of emerging markets ... 'The
G-8 has long since outlived its purpose,' said Jim O'Neill, chief economist at
Goldman Sachs ... "
September 23 - Bloomberg (Alex Nicholson): "The Russian government approved a
draft of its 2010 budget, which contains an estimated deficit equivalent to
6.8% of gross domestic product ... "
September 25 - Bloomberg (Rebecca Christie and Sandrine Rastello): "European
nations are resisting the transfer of more power to emerging markets at the
International Monetary Fund..."
September 23 - Bloomberg (Alex Nicholson): "Russia's government plans to spend
1.9 trillion rubles ($53 billion) next year on infrastructure projects and the
'modernization' of the economy, Prime Mininster Vladimir Putin said ... "
Currency Watch
September 24 - Bloomberg (Lori Rothman and Matt Townsend): "The dollar would be
facing a lack of confidence over budget deficits if it weren't the world's
reserve currency, said Robert Sinche, an independent strategist. 'If the US was
an emerging market country, we know there would be a crisis of confidence in
the currency,' Sinche, former head of strategy for global rates, currencies and
commodities at Bank of America Corp., said ... "
September 23 - Bloomberg (Christopher Anstey): "China's central bank deputy
governor, Hu Xiaolian, proposed setting up a multinational sovereign wealth
fund to invest in developing nations and help reduce the danger of another
financial crisis. 'Considerations can be to setting up a 'supra-sovereign
wealth investment fund' to help channel capital inflow" into developing nations
to help them become engines of global growth, Hu said in a paper posted on a
Group of 20 Web site ... Hu reiterated Chinese calls for greater use of special
drawing rights, the International Monetary Fund's unit of account, instead of
the dollar."
The dollar index this week added 0.4% in a volatile trading week to 76.74. For
the week on the upside, the South Korean won increased 1.8%, the Japanese yen
1.8%, the New Zealand dollar 1.1%, the Norwegian krone 1.0%, the Brazilian real
0.7%, and the Swiss franc 0.1%. On the downside, the Mexican peso declined
2.1%, the Canadian dollar 2.1%, the British pound 2.1%, the Swedish krone 1.3%,
and the Euro 0.2%.
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