Page 2 of 3 CREDIT BUBBLE BULLETIN Dubai watch
Commentary and weekly watch by Doug Noland
Investment grade issuers included FMC Corp $300 million.
Junk issuers included Clearwire Communications $920 million, AMD $500 million,
CEDC Financial $380 million, and Salem Communications $300 million.
I saw no convert issues this week.
International dollar-denominated debt issuers included NIBC Bank $2.0 billion ,
Digicel $500 million, Power Sector Assets $600 million, Grupo Televisa $600
million, and Aegon $500 million.
U.K. 10-year gilt yields fell 10 bps to 3.54%, and German bund yields dropped 9
bps to 3.16%. The German DAX equities index added 0.4% (up 18.2% y-t-d).
Japanese 10-year "JGB" yields
sank 6 bps to 1.25%. The Nikkei 225 sank 4.6% (up 2.5%). Dubai debt problems
weighed on the emerging markets as the week came to an end. For the week,
Brazil's Bovespa equities index gained 1.1% (up 78.6%), and Mexico's Bolsa
added 0.4% (up 37.5%).Russia's RTS equities index was hit for 6.8% (up 116.3%).
India's Sensex equities index declined 2.3% (up 72.4%). China's Shanghai
Exchange fell 6.4%, lowering 2009 gains to 70.0%. Brazil's benchmark dollar
bond yields dropped 13 bps to 4.81%, and Mexico's benchmark bond yields
declined one basis point to 4.83%.
Freddie Mac 30-year fixed mortgage rates fell 5 bps to 4.78% (down 117bps
y-o-y). Fifteen-year fixed rates declined 3 bps to 4.29% (down 145bps y-o-y).
One-year ARMs were unchanged at 4.35% (down 83bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 5 bps to 5.90%
(down 141bps y-o-y).
Federal Reserve Credit declined $1.6 billion last week to $2.190 TN. Fed Credit
has declined $56.7 billion y-t-d, although it expanded $95.9 billion over the
past 52 weeks. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this
past week (ended 11/25) declined $2.7 billion to $2.925 TN. "Custody holdings"
have expanded at an 18.0% rate y-t-d, and were up $427 billion over the past
year, or 17.1%.
M2 (narrow) "money" supply increased $2.7 billion to $8.392 TN (week of 11/16).
Narrow "money" has expanded at a 2.7% rate y-t-d and 5.4% over the past year.
For the week, Currency slipped $0.5 billion , and Demand & Checkable
Deposits dropped $27 billion . Savings Deposits jumped $39.4 billion , while
Small Denominated Deposits declined $6.9 billion . Retail Money Funds fell $2.3
billion .
Total Money Market Fund assets (from Invest Co Inst) declined $8.9 billion to
$3.330 TN. Money fund assets have declined $501 billion y-t-d, or 14.5%
annualized. Money funds dropped $384 billion , or 10.4%, over the past year.
Total Commercial Paper outstanding declined $10.6 billion (15-wk gain of $182
billion ) to $1.257 TN. CP has declined $425 billion y-t-d (28.0% annualized)
and $384 billion over the past year (23.4%). Asset-backed CP added $1.2 billion
last week to $498 billion , with a 52-wk drop of $249 billion (35.6%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $803 billion y-o-y to a record $7.537 TN. Reserves have
increased $772 billion year-to-date.
Global Credit Market Watch
November 25 - Bloomberg (Laura Cochrane): "Emerging-market bond returns rose to
an all-time high as the global economic recovery and record-low interest rates
spurred demand for higher yielding assets from the world's fast-growing
nations. JPMorgan Chase & Co.'s Emerging Markets Bond Index, the EMBI+,
jumped to 496.74... the highest point since JPMorgan's data began in December
1993 ... Emerging-market governments and companies have sold 74% more bonds in
2009 than last year, with a sales rising to a record $566 billion ... "
November 23 - Bloomberg (Gabrielle Coppola and Nikolaj Gammeltoft): "Borrowers
have sold a record $1.171 trillion in U.S. corporate bonds in 2009, surpassing
the amount sold in 2007 ... Sales of investment-grade and high-yield, high-risk
debt compare with the more than $1.167 trillion that companies sold in all of
2007, a record year for corporate bond issuance ... "
November 27 - Bloomberg (Christos Ziotis and Paul Tugwell): "Greek Finance
Minister George Papaconstantinou said recent market volatility related to
Greece was due in part to speculators. 'What we see in recent days in markets
is in part due to speculative maneuvers as well as to the loss of credibility
because of the previous government,' he told reporters ... Greek stocks posted
their biggest loss in more than a year yesterday and the difference in yield,
or spread, between Greek and German 10-year government bonds widened to 209 bps
today, the most since May 4, on concern that government finances are worsening.
Greece expects a budget deficit this year of 12.7% of gross domestic product,
the European Union' highest."
November 23 - Bloomberg (Tasneem Brogger and Agnes Lovasz): "Eastern Europe,
where currencies and equities combined to produce total dollar-denominated
returns of about 50% this year, is showing signs of unraveling as the
continent's favorite investment because of runaway debts. Hungary's forint is
the second-worst performer in the past month of 26 emerging-market currencies
... Slovakia, Poland, Bulgaria and the Czech Republic are among seven countries
showing the steepest increase in credit risk of 21 sovereign credit-default
swaps tracked by Bloomberg."
November 25 - Bloomberg (Aaron Eglitis): "Latvian house prices fell 59.7% in
the third quarter from a year earlier, the steepest drop among 30 markets
surveyed worldwide, according to the Global Property Guide's quarterly report
... 'The house price falls in several countries have been much larger than
house price rises anywhere, and include unprecedentedly severe falls' in
Latvia, the United Arab Emirates, Bulgaria, Iceland, Russia and Slovakia, the
publishers of the report said, citing inflation-adjusted data."
Global Government Finance Bubble Watch
November 24 - Bloomberg (Craig Torres): "Federal Reserve officials said
record-low interest rates might fuel 'excessive' speculation in financial
markets and possibly dislodge expectations for low inflation ... 'Members noted
the possibility that some negative side effects might result from the
maintenance of very low short-term interest rates for an extended period,'
minutes of the Nov 3-4 meeting said, 'including the possibility that such a
policy stance could lead to excessive risk-taking in financial markets or an
unanchoring of inflation expectations.'"
November 23 - Bloomberg (Michael McKee and Steve Matthews): "Federal Reserve
Bank of St. Louis President James Bullard said the central bank should retain
the flexibility to respond to any weakening in the economy by extending beyond
March its authority to buy mortgage-backed securities and agency bonds. 'I
would just like to keep them active at a very low level instead of saying we're
shutting down, shutting down permanently,' Bullard told reporters ...
'Initially it would do nothing for the economy, but it would give the Fed the
option to react to future news as it comes in.'"
November 27 - Bloomberg: "China's Politburo, the Communist Party's top
decision-making body, said the nation will maintain stimulus policies next year
as the world's third-biggest economy recovers from the global slump. The
government will continue a proactive fiscal policy and a 'moderately loose'
monetary stance, the state-run Xinhua News Agency reported today after a
meeting chaired by President Hu Jintao. China will maintain policy continuity
and stability, Xinhua said ... "
November 27 - Wall Street Journal (Andrew Batson): "The new investments funded
by China's stimulus plan may swamp world markets and lead to a surge in trade
conflicts, an international business group said ... The European Union Chamber
of Commerce in China ... said a combination of easy credit and other incentives
for Chinese companies to expand has led to the construction of many new
factories in areas like steel, aluminum, cement and chemicals. The increase in
industrial capacity - at a time of global economic weakness - could drive down
profit margins worldwide and lead to a backlash from other countries, the
chamber said. 'The Chinese stimulus package has poured credit into increasingly
questionable projects and will almost certainly increase direct and indirect
subsidies to investment and manufacturing,' the report says. 'China's growth
model requires that external demand - the European Union and the United States
- be able to absorb the overcapacity it produces,' a prospect that is
increasingly unlikely given the weak economic recovery in the developed
countries."
November 25 - Bloomberg (Sandrine Rastello): "The International Monetary Fund
said it will have access to a credit line of up to $600 billion to make loans
during financial crises after contributing countries agreed to fold commitments
into one pool. The agreement, yet to be approved by the IMF board, adds as many
as 13 members from the current 26 to the so-called New Arrangements to Borrow,
including emerging nations China, Russia, Brazil and India, the IMF said ...
The decision 'marks an important moment for multilateralism and the fund, which
will help the IMF's effectiveness in its response to crises,' Managing Director
Dominique Strauss-Kahn said ... "
November 23 - Bloomberg: "China is risking a Japan-style bubble unless the
country's regulators start to rein a record lending boom, BNP Paribas said.
'We're entering a phase where China could experience similar asset bubble that
we saw in Japan in the 1980s,' said Erwin Sanft, head of China and Hong Kong
equities research at BNP Paribas. 'If China continues its loose fiscal and
monetary policy that could be those problems.' China implemented a stimulus
package, cut interest rates five times since September 2008 and encouraged $1.3
trillion of lending to boost domestic spending ... The credit expansion helped
the Shanghai Composite Index rally 83% this year and home prices in 70 major
cities climb at the fastest pace in 14 months in October."
Currency Watch
November 25 - Bloomberg (Nicholas Larkin and Glenys Sim): "Gold climbed to a
record in New York and London on a further drop by the dollar and on a report
that India may buy more bullion for its central-bank reserves. Gold futures
have rallied 12% since India said on Nov. 3 it bought 200 metric tons of metal
from the International Monetary Fund ... 'Central-bank buying has been one of
the main factors of this recent rally,' Peter Fertig, owner of Quantitative
Commodity Research ... said ... 'The weaker dollar is driving commodities
higher.'"
November 25 - Bloomberg (Bo Nielsen and Oliver Biggadike): "The dollar
approached a 14-year low against the yen as the Federal Reserve's signal that
it will tolerate a weaker greenback encouraged investors to buy higher-yielding
assets outside the U.S ... 'Markets took it as if the Fed gave a green light to
sell the dollar,' said Geoffrey Yu ... strategist at UBS ... 'At the same time,
it seems that all central banks are sounding a bit more positive.'"
November 25 - Bloomberg: "China tightened rules on individuals transferring
yuan and foreign exchange between bank accounts after speculation the nation's
currency will strengthen caused a surge in capital inflows. An overseas
individual or institution is not allowed to send foreign currencies to five or
more Chinese individuals to convert it into the yuan on a single day or on
consecutive days ... 'The main aim of the new rules is to control inflows of
hot money,' said Zhao Qingming, a senior analyst ... at China Construction Bank
... 'Individuals' cross-border transfers are an important channel for hot money
to flow into China.'"
November 27 - Wall Street Journal (James Hookway and Alex Frangos): "Vietnam's
decision to devalue its currency raises tensions across Asia as the region's
export-driven economies jostle for an edge amid a slow recovery in orders from
the U.S. and Europe. Vietnam shaved 5% off the value of its currency, the dong
... its third devaluation since June 2008."
November 27 - Wall Street Journal (Katie Martin and Ira Iosebashvili): "Russian
authorities escalated their campaign to discourage speculative investments,
which have been flooding the country and risk driving up the value of the ruble
and destabilizing the economy. The Russian central bank ... said it would to
boost its intervention in the currency markets, increasing ruble sales in a
recently tightened trading range."
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