Page 2 of 3 CREDIT BUBBLE BULLETIN About a half paradigm
Commentary and weekly watch by Doug Noland
One-month Treasury bill rates ended the week at 4 bps, and three-month bills
closed at 5 bps. Two-year government yields declined 5 bps to 0.73%. Five-year
T-note yields declined one basis point to 2.24%. Ten-year yields were 10 bps
higher to 3.50%. Long bond yields jumped 17 bps to 4.39%. Benchmark Fannie MBS
yields added one basis point to 4.30%. The spread between 10-year Treasuries
and benchmark MBS yields narrowed 9 to 80 bps. Agency 10-yr debt spreads
declined 2.8 bps to negative 2.8 bps. The implied yield on December 2010
eurodollar futures dropped 9.5 bps to 1.435%. The 10-year dollar swap spread
declined 2.5 to 15.75 bps; and the 30-year swap spread declined 2 to negative
10.25 bps. Corporate bond spreads were
mixed to wider. An index of investment grade bond spreads widened one basis
point to 149, and an index of junk spreads widened 14 bps to 569 bps.
Investment grade issuers included Dupont $2.0bn, IBM $2.0bn, Bank of New York
$1.05bn, Yale $1.0bn, Regions Financial $700 million, Reinsurance Group $400
million, Equifax $275 million, Clorox $300 million, FPL Group $200 million, and
Novant Health $100 million.
For the first time in 19 weeks, junk bond funds saw outflows ($177 million)
this week. Junk issuers included Colt $250 million, Starwood Hotels $250
million, Cott Beverages $215 million, RSC Equipment Rental $200 million,
Netflix $200 million, and Service Corp Intl $150 million.
Convert issues included Rei Agro $105 million.
International dollar-denominated debt issuers included Nordea Bank $2.0bn,
Abbey National $1.5bn, Vale Overseas $1.0bn, Woodside Finance $700 million,
Virgin Media $600 million, Diageo $500 million, Telefonos Mexico $500 million,
Norwegian Cruise Line $450 million, Pacific Rubiales Energy $450 million, Bumi
Capital $300 million, General Maritime $300 million, and Agile Property $300
million.
U.K. 10-year gilt yields surged 27 bps to 3.88%, and German bund yields jumped
13 bps to 3.36%. The German DAX equities index rallied 1.4% (up 14.1% y-t-d).
Japanese 10-year "JGB" yields increased 4 bps to 1.44%. The Nikkei 225 declined
1.0% (up 10.5%). Emerging markets were mixed. Russia's RTS equities index
declined 0.9% (up 111.4%). India's Sensex equities added 0.7% (up 67.5%).
China's Shanghai Exchange surged 5.6%, boosting 2009 gains to 73.8%. Brazil's
benchmark dollar bond yields were little changed at 5.25%.
Freddie Mac 30-year fixed mortgage rates increased 3 bps to 5.03% (down 117bps
y-o-y). Fifteen-year fixed rates added 3 bps to 4.46% (down 142bps y-o-y).
One-year ARMs increased 3 bps to 4.57% (down 68bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 6 bps to 6.10%
(down 147bps y-o-y).
Federal Reserve Credit $bn last week to $2.1 TN. Fed Credit has declined $9bn
y-t-d, although it expanded $28bn over the past 52 weeks (15%). Elsewhere, Fed
Foreign Holdings of Treasury, Agency Debt this past week (ended 11/4) $bn to a
record $2. TN. "Custody holdings" have expanded at an 18% rate y-t-d, and were
up $41bn over the past year, or 16%.
M2 (narrow) "money" supply jumped $35.8bn to $8.394 TN (week of 10/26). Narrow
"money" has expanded at a 3.0% rate y-t-d and 5.7% over the past year. For the
week, Currency declined $1.1bn, and Demand & Checkable Deposits dropped
$9.6bn. Savings Deposits surged $63.9bn, while Small Denominated Deposits fell
$7.3bn. Retail Money Funds sank $9.9bn.
Total Money Market Fund assets (from Invest Co Inst) dropped $31.3bn to $3.339
TN. Money fund assets have declined $492bn y-t-d, or 15.2% annualized. Money
funds declined $269bn, or 7.5%, over the past year.
Total Commercial Paper outstanding dropped $61.7bn (12-wk gain of $241bn) to
$1.315 TN. CP has declined $366bn y-t-d (26% annualized) and $285bn over the
past year (18%). Asset-backed CP fell $28.0bn last week to $515bn, with a 52-wk
drop of $217bn (30%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $689bn y-o-y to a record $7.489.9 TN. Reserves have
increased $725bn year-to-date.
Global Credit Market Watch
November 3 - Bloomberg: "The widening yield spread between China's bills at
auction and in the secondary market shows investors are speculating the central
bank is set to tighten monetary policy, China International Capital Corp. said.
‘China is seeing a return of inflation,' said Xu Xiaoqing, a bond analyst in
Beijing at CICC ... 'A resumption in the increase of bill yields during
auctions would indicate the central bank has switched to a 'neutral' from a
'loose' policy to control inflation expectations.'"
November 5 - Bloomberg (John Glover): "The global speculative-grade default
rate rose to 12.4% in October, surpassing the record set in 1991 for the
highest proportion of defaults since the Great Depression, according to
Moody's…"
Global Government Finance Bubble Watch
November 6 - Bloomberg (Gonzalo Vina and Emma Ross-Thomas): "U.K. Chancellor of
the Exchequer Alistair Darling said the Group of 20 nations should develop a
way to tackle asset-price bubbles as the world's leading economies recover. 'We
have got to make sure we don't get ourselves into a situation where some
pressure starts to rise and then it becomes bigger and bigger and when the
whole thing comes to an end it has catastrophic consequences,' Darling said…"
November 3 - Bloomberg (Jon Menon and Andrew MacAskill): "Royal Bank of
Scotland Group Plc and Lloyds Banking Group Plc will receive 31.3 billion
pounds ($51 billion) in a second bailout from the U.K. taxpayer in return for
putting a cap on bonuses. The Treasury will inject 25.5 billion pounds of
capital into RBS, for a total of 45.5 billion pounds, making it the costliest
bailout of any bank worldwide. The government will fund about a quarter of
Lloyds's 21 billion-pound fundraising ... The rescue will bring the government
closer to full ownership over RBS, while Lloyds will escape government
control."
November 5 - Bloomberg (Jennifer Ryan): "The Bank of England raised its
bond-purchase plan by 25 billion pounds ($41 billion), the third increase since
March, as policy makers try to cement Britain's recovery from its longest
recession on record. The nine-member Monetary Policy Committee, led by Governor
Mervyn King, today raised the amount of bonds it will buy with newly created
money to 200 billion pounds."
Currency Watch
November 4 - Bloomberg (Juan Pablo Spinetto and Alexander Kwiatkowski): "Crude
oil, which has risen 80% this year, is causing the US dollar to weaken, driving
metals and other commodities higher, according to Jeffrey Currie, head of
commodity research at Goldman Sachs ... While oil has risen, the US currency
has weakened, leading to speculation that the dollar's depreciation is driving
investors to buy oil as an inflation hedge, thereby pushing up the price of
crude. 'I would argue the other way,' Currie said ... 'I would argue that
higher oil prices drive the dollar down and then the weaker dollar drives the
metals and soft commodities up…Oil represents 40% to 50% of the US current
account deficit, so a higher oil price represents an outflow of dollars that
pushes the currency lower…"
November 5 - Bloomberg (Anil Varma): "The dollar…will slide further as nations
that hold the world's biggest reserves seek 'safer' assets including gold, BNP
Paribas SA said. …China, Japan, India and Russia, four of the five biggest
foreign-exchange reserve holders, raised gold stockpiles to record levels this
year ... India paid $6.7 billion to buy 200 tons of gold from the International
Monetary Fund ... China said in April it has boosted reserves of the metal by
76% since 2003. 'The Reserve Bank of India's gold purchase seems to be part of
a broader, global theme of central banks worldwide seeking a stronger, safer
alternative to the dollar to park their reserves,' Manoj Rane, treasurer in
Mumbai at BNP Paribas, France's biggest bank, said ... 'This trend will only
feed the dollar's weakness.'"
The dollar index declined 0.7% to 75.75. For the week on the upside, the South
African rand increased 3.7%, the Brazilian real 2.4%, the Australian dollar
2.0%, the Swedish krona 1.4%, the South Korean won 1.3%, the Canadian dollar
1.0%, the British pound 1.0%, the New Zealand dollar 1.0%, the Swiss franc
0.9%, and the Euro 0.9%. On the downside, the Mexican peso declined 1.6%.
Commodities Watch
November 3 - Bloomberg (Thomas Kutty Abraham and Kim Kyoungwha): "India, the
world's biggest gold consumer, bought 200 tons from the International Monetary
Fund for $6.7 billion as central banks show increased interest in diversifying
their holdings to protect against a slumping dollar. The transaction,
equivalent to 8% of world annual mine production, was the IMF's first such sale
in nine years and propels India to the ninth-biggest government owner globally
... 'The fall in the US dollar seems to be pushing all the central banks to
strengthen their portfolio with gold,' said N R Bhanumurthy, professor at the
National Institute of Public Finance and Policy in New Delhi. 'Gold is a safe
store of value compared to the US dollar.'"
November 4 - Bloomberg (Claudia Carpenter): "India's purchase of 200 metric
tons of gold in two weeks was more than total European central bank sales last
year, a sign that central banks may be looking to diversify their assets as the
dollar slides. 'This could be the beginning of a sea change in central bank
sentiment about what they hold,' said James Moore, an analyst at
TheBullionDesk.com ... 'The perception of gold compared to five or 10 years ago
has changed completely.'"
The CRB index slipped 0.3% this week (up 17.4% y-t-d). The Goldman Sachs
Commodities Index (GSCI) was unchanged (up 42.4%). Gold surged 4.8% to close at
$1,096 (up 24.2%). Silver surged 7.0% to $17.39 (up 54.0%). December Crude
gained 69 cents to $77.69 (up 74%). December Gasoline declined 1.6% (up 82%),
and December Natural Gas sank 8.6% (down 18%). December Copper was little
changed (up 110%). December Wheat added 0.6% (down 19%), and December Corn
increased 0.3% (down 10% y-t-d).
China Bubble Watch
November 3 - Reuters: "New bank lending in China may have hit 300-400 billion
yuan ($44-59 billion) in October, the Shanghai Securities News reported ... The
newspaper cited unnamed bankers who based the estimate, which is lower than the
516.7 billion yuan total in September, on a reported rise in new lending by the
country's biggest banks. Lending by the four biggest banks 'clearly recovered'
in October, climbing to 136 billion yuan from 110 billion yuan in September,
the official China Securities Newspaper reported."
November 4 - Bloomberg: "China's policy makers must avert stock and property
market bubbles after lending swelled to a record $1.27 trillion this year, the
World Bank said. The ... lender raised China's economic growth forecast for
this year to 8.4% from 7.2% and Beijing-based senior economist Louis Kuijs said
the central bank will "eventually" have to rein in credit to ensure resources
are properly allocated."
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