Page 1 of 3 CREDIT BUBBLE BULLETIN The beginning of the end?
Commentary and weekly watch by Doug Noland
Today
is a briefer-than usual discussion: a more regular commentary is planned for
next week - and at this time I assume my topic will be "a global reflation
update".
Recent tumult in periphery European debt markets has reignited global crisis
fears. The dollar's rally and commodities' downturn have some analysts again
talking deflation. The hot emerging markets have certainly chilled. In China,
authorities are imposing some controls on bank lending. Have the Chinese become
serious about reining in financial excess? Will their efforts - purposely or
otherwise - pierce China's credit bubble? Are sovereign debt troubles and China
tightening a harbinger for global reflation's demise?
What role have the leveraged speculators played in recent weakness across
global risk markets? How crowded was the
global reflation trade? Has it been a case of everyone caught in similar
positions? Have "non-correlated" trades become highly correlated? It is when a
series of trades abruptly moves against the complacent crowd that the more
aggressive players find themselves in trouble and forced to liquidate into
unfriendly markets. And there is nothing like forced liquidations to really get
some animal spirits aroused. It's a dog-eat-dog world.
How big is the so-called "dollar carry trade"? The yen carry trade? How
important of a source of liquidity have these leveraged trades been to the
global markets and economies?
How much of an impact will global market unrest have on our fragile recovery?
The stock market has been under pressure - and that's not so helpful for
already fragile confidence. Yet, how much of an offset is provided by declining
Treasury and mortgage-backed yields? How much benefit will the stronger dollar
provide in the way of lower energy and import costs? Notably, there has been so
far only limited widening of US risk premiums. Is this an indication of US
system resiliency - or complacency?
In spite of global market tumult, last week was yet another big one for US
corporate debt issuance. It is worth noting that junk bond spread closed Friday
at 494 basis points (bps), only 3 bps wider for the week. Junk spreads have
barely budged from January lows (487bps) and remain significantly below the
high of 1,300 recorded last March. Investment grade spreads are also less than
half of the levels from last spring. And while they have widened marginally,
emerging market debt spreads are not far off 15-month lows. Brazil and Mexico
can still borrow for 10 years at not much over 5%. For the most part, financial
conditions remain loose.
Five-year Treasury yields are back down to 2.15%. Is this an indication of
ongoing global deleveraging and powerful deflationary forces? Or are
rock-bottom Treasury and bund yields instead indicating unrelenting global
liquidity excess? Do unsettled global markets work to keep central bankers
timid and monetary policy ultra-loose? How closely are Chinese following global
market developments? Is the recent pullback in global risk markets the
beginning of the end for global reflation or the pause that refreshes? Next
week I'll dive into what is an exceptionally challenging analytical task.
WEEKLY WATCH
For the week, the S&P500 dipped 0.7% (down 4.4% y-t-d), and the Dow slipped
0.5% (down 4.0% y-t-d). The Morgan Stanley Cyclicals declined 1.0% (down 6.5%),
and Transports fell 1.9% (down 6.8%). The Morgan Stanley Consumer index dropped
1.5% (down 3.8%), and the Utilities fell 2.1% (down 7.0%). The Banks sank 3.7%
(up 4.9%), and the Broker/Dealers fell 1.0% (down 4.3%). The S&P 400
Mid-Caps dipped 0.8% (down 4.1%), and the small cap Russell 2000 dropped 1.5%
(down 5.2%). The Nasdaq100 rallied 0.3% (down 6.1%), and the Morgan Stanley
High Tech index gained 1.2% (down 6.6%). The Semiconductors recovered 1.2%
(down 11.1%). The InteractiveWeek Internet index increased 0.6% (down 6.2%).
The Biotechs gained 0.3% (up 2.6%). Although bullion was down about $15, the
HUI gold index rallied 4.1% (down 9.4%).
One-month Treasury bill rates ended the week at 2 bps, and three-month bills
closed at 9 bps. Two-year government yields fell 3 bps to 0.69%. Five-year
T-note yields dropped 9 bps to 2.16%. Ten-year yields declined 2 bps to 3.57%.
Long bond yields increased 3 bps to 4.52%. Benchmark Fannie MBS yields
decreased 4 bps to 4.30%. The spread between 10-year Treasury and benchmark MBS
yields narrowed 2 to 73 bps. Agency 10-yr debt spreads widened 4 to 40 bps. The
implied yield on December 2010 eurodollar futures declined 6 bps to 0.93%. The
10-year dollar swap spread decreased 2.5 to 10.0, and the 30-year swap spread
decreased 3.75 to negative 14.25. Corporate bond spreads were somewhat wider.
An index of investment grade bond spreads widened 4 to 100 bps, and an index of
junk spreads widened 3 to 494 bps.
Investment grade issuers included Kraft Foods $8.5bn, Williams Partners $3.5bn,
PNC Funding $2.0bn, Procter & Gamble $1.25bn, Valero Energy $1.2bn,
Wisconsin Electric $530 million, Florida Power & Light $500 million,
Pacific Lifecorp $450 million,Building Materials Corp $250 million, GATX $250
million, and North American Development Bank $250 million.
The list of junk issuers included Denbury Resources $1.0bn, McClatchy $875
million, Crosstex Energy $725 million, Readers Digest $525 million, Manitowoc
$400 million, Hilcorp Energy $300 million, Omega Healthcare $200 million, and
CNG Holdings $200 million.
I saw no convert issues.
International dollar debt issuers included Asian Development Bank $2.5bn,
Lithuania $2.0bn, Bank of China $1.6bn, Council of Europe $1.0bn, Korea
Development Bank $750 million, Coca-Cola Femsa $500 million, Corp Pequera $175
million and Banco Pine $125 million.
U.K. 10-year gilt yields declined 3 bps to 3.88%, and German bund yields
dropped 8 bps to 3.12%. Bond yields in Greece fell 23 bps to 6.62%. The German
DAX equities index declined 3.1% (down 8.8% y-t-d). Japanese 10-year "JGB"
yields rose 5 bps to 1.36%. The Nikkei 225 dipped 1.4% (down 4.6%). Emerging
markets were on the defensive. For the week, Brazil's Bovespa equities index
was hit for 4.0% (down 8.5%), and Mexico's Bolsa slipped 0.6% (down 4.6%).
Russia's RTS equities index fell 3.8% (down 2.1%). India's Sensex equities
index sank 3.5% (down 9.6%). China's Shanghai Exchange declined 1.7% (down
10.3%). Brazil's benchmark dollar bond yields rose 8 bps to 5.35%, while
Mexico's benchmark bond yields dipped one basis point to 5.18%.
Freddie Mac 30-year fixed mortgage rates increased 3 bps to 5.01% (down 24bps
y-o-y). Fifteen-year fixed rates added one basis point to 4.40% (down 52bps
y-o-y). One-year ARMs sank 7 bps to 4.22% (down 70bps y-o-y). Bankrate's survey
of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 2 bps to
5.90% (down 105bps y-o-y).
Federal Reserve Credit declined $3.3bn last week to $2.231 TN. Fed Credit was
up $391bn, or 21.2%, from a year ago. Elsewhere, Fed Foreign Holdings of
Treasury, Agency Debt this past week (ended 2/3) fell $1.3bn to $2.947 TN.
"Custody holdings" expanded $392bn, or 15.4%, over the past year.
M2 (narrow) "money" supply increased $6.0bn to $8.464TN (week of 1/25). Narrow
"money" expanded 1.7% over the past 52 weeks. For the week, Currency added
$0.8bn, and Demand & Checkable Deposits rose $11.3bn. Savings Deposits
gained $6.2bn, while Small Denominated Deposits declined $6.0bn. Retail Money
Funds fell $6.3bn.
Total Money Market Fund assets (from Invest Co Inst) declined $13.5bn to $3.205
TN. Over the past year, money fund assets dropped $702bn, or 18.0%.
Total Commercial Paper outstanding sank $24.2bn last week to $1.123 TN. CP
dropped $463bn over the past year (29.2%). Asset-backed CP dipped $1.7bn last
week to $429bn, with a 52-wk drop of $305bn (41.5%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.079 TN y-o-y, or 16.0%, to $7.814 TN.
Global Credit Market Watch
February 5 - Bloomberg (Paul Dobson): "The cost of insuring against US and U.K.
debt defaults may rise in the same way as it has for so-called European
peripheral nations including Greece and Portugal, Deutsche Bank AG said. ‘The
problems currently faced by peripheral Europe could be a dress rehearsal for
what the US and U.K. may face further down the road,' Jim Reid, a strategist at
Deutsche Bank in London, wrote ... "
January 25 - Financial Times (David Oakley): "European governments will need to
borrow a record €2,200bn from capital markets this year to finance budget
deficits. The projected borrowing is a 3.7% increase on the €2,120bn raised in
2009 ... This will put pressure on public finances as yields and volatility are
set to rise."
January 27 - Bloomberg (Shannon D. Harrington and Abigail Moses): "Traders are
buying protection against defaults on sovereign debt at more than five times
the rate of company bonds as governments fund ballooning deficits. The net
amount of credit-default swaps outstanding on 54 governments from Japan to
Italy jumped 14.2% since Oct. 9, compared with 2.6% for all other contracts ...
European countries led the jump of protection on Portugal climbing 23%, Spain
16% Greece 5%."
January 28 - Bloomberg (Gillian Wee): "U.S. universities boosted their
long-term debt by 54% in the year ended June 30 ... Universities, on average,
had $167.8 million in debt in the 12 months ended June 30, with the biggest
borrowing done by endowments with more than $1 billion in assets, according to
... the National Association of College and University Business Officers and
Commonfund ... "
Global Government Finance Bubble Watch
February 3 - Bloomberg: "China Investment Corp., the nation's $300 billion
sovereign wealth fund, may get at least $250 billion in extra funds before the
Feb. 14 Chinese New Year, according to Z-Ben Advisors Ltd. CIC is likely to
invest the cash in the first quarter with 60% or more of the new funds to be
allocated to third- party fund managers, according to ... Z-Ben Advisors, a ...
company that provides research on China's fund-management industry."
February 5 - Bloomberg (Shiyin Chen and Chan Tien Hin): "Emerging market equity
funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks
... EPFR Global said. Investors removed almost $1 billion from global emerging
market stock funds in the week ... "
January 28 - Bloomberg (Jon Menon): "The British government is seeking to raise
more cash by selling its 71.5 billion-pound ($116 billion) stake in three
crippled banks than Margaret Thatcher generated by disposing of state-owned
businesses during her entire 11 years in office. From 1979 to 1990, then-Prime
Minister Thatcher's three administrations privatized more than 20 companies,
including British Gas and British Airways. The total raised would now be worth
about 68.5 billion pounds, adjusted for inflation ... Prime Minister Gordon
Brown hasn't disclosed a timetable for the sale of the U.K.'s stakes in Royal
Bank of Scotland Group Plc, Lloyds Banking Group Plc and Northern Rock Plc ...
‘It's such a huge stake, it will clearly dominate the political agenda,' said
Tom Kirchmaier, a fellow at the London School of Economics. ‘Any government
will probably have a substantial stake for a long time."
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
