For the week, the Dow fell 3.0% (down 10.3% y-t-d) and the S&P500 declined 2.9% (down 11.9%). The Morgan Stanley Cyclical index dropped 3.1% (down 10.1%), and the Morgan Stanley Consumer index declined 2.4% (down 9.9%). The Transports slipped 1.3% (down 1.3%), while the Utilities recovered 0.3% (down 11.7%). The small cap Russell 2000 was hit for 3.8% (down 13.8%), and the S&P400 Mid-Caps were smacked for 3.5% (down 11.3%). The NASDAQ100 (down 18.1%) and the Morgan Stanley High Tech (down 16.7%) indexes were both down 2.1%. The Semiconductors fell 1.0% (down 15.5%). The Street.com Internet Index declined 2.1% (down 14%), and the NASDAQ Telecommunications index dropped 3.7% (down 12.7%). The Biotechs fell 4.1% (down 12%). Financials remain under intense selling pressure. The Broker/Dealers sank 7.1% (down 18.6%), and the Banks dropped 6.1% (down 13%). With Bullion little changed, the HUI Gold index added 0.3% (up 19%).
Three-month Treasury bill rates sank 40 bps this past week to 1.44%. Two-year government yields fell 10 bps to 1.52%. Five-year T-note yields declined 4 bps to 2.43%, while ten-year yields added 2.5 bps to 3.53%. Long-bond yields jumped 14 bps to 4.54%. The 2yr/10yr spread ended the week at 201 bps. The implied yield on 3-month December ’08 Eurodollars rose 4.5 bps to 2.255%. Benchmark Fannie MBS yields surged 40 bps to 5.74%, this week getting killed against Treasuries. The spread between MBS and Treasuries jumped 38 to an alarming 220 bps. The spread on Fannie’s 5% 2017 note was 14 wider at 88 bps and the spread on Freddie’s 5% 2017 note was 14 wider at 87 bps. The 10-year dollar swap spread surged 15 to 86. Corporate bond spreads were wider, with financial sector risk premiums blowing out this week. An index of investment grade bonds spreads was 13 wider to a record 178, and an index of junk bonds spreads 20 wider to 620 bps.
Investment grade issuance included Kellogg $750 million, Waste Management $600 million, Praxair $500 million, Kansas City P&L $350 million, Mattel $350 million, Cigna $300 million, Public Service E&G $300 million, Pitney Bowes $250 million, and Scana Corp $250 million.
The junk bond market remains essentially closed for business.
Convert issuance included Central Euro Media $425 million, Nuvasive $200 million, Bill Barrett $173 million and Stillwater Mining $165 million.
International dollar bond issuance included Philips Electronics $3.0bn.
German 10-year bund yields dropped 10 bps to 3.79%, as the DAX equities index sank 3.5% (down 19.3% y-t-d). Japanese “JGB” yields were little changed at 1.35%. The Nikkei 225 dropped 6.0% (down 16.5% y-t-d and 23.8% y-o-y). Emerging markets were under moderate selling pressure. Brazil’s benchmark dollar bond yields rose 10 bps to 5.75%. Brazil’s Bovespa equities index declined 2.6% (down 3.2% y-t-d). The Mexican Bolsa fell 1.1% (down 3.1% y-t-d). Mexico’s 10-year $ yields rose 9 bps to 5.12%.Russia’s RTS equities index declined 2.5% (down 12.1% y-t-d). India’s Sensex equities index was clobbered for 10.4%, boosting y-t-d declines to 21.3%. China’s Shanghai Exchange slipped 1.1% this week (down 18.3% y-t-d).
Freddie Mac 30-year fixed mortgage rates dropped 21 bps this week to 6.03% (reversing last week's increase), with rates now down 11 bps over the past year. Fifteen-year fixed rates dropped 25 bps to 5.47% (down 39bps y-o-y). One-year adjustable rates fell 17 bps to 4.94% (down 53bps y-o-y).
Bank Credit surged $37.4bn during the most recent data week (2/27) to a record $9.370 TN. Bank Credit has now posted a 32-week surge of $727bn (13.7% annualized) and a 52-week rise of $956bn, or 11.4%. For the week, Securities Credit jumped $28.8bn. Loans & Leases increased $8.6bn to a record $6.894 TN (32-wk gain of $570bn). C&I loans gained $5.9bn, with one-year growth of 22.5%. Real Estate loans rose $8.7bn (up 7.7% y-o-y). Consumer loans declined $3.0bn. Securities loans fell $10.0bn, while Other loans increased $7.0bn. Examining the liability side, "Other Liabilities" jumped $44bn.
M2 (narrow) “money” supply surged $33.1bn to a record $7.630 TN (week of 2/25). Narrow “money” expanded $168bn over the past eight weeks, or 14.6% annualized, with a y-o-y rise of $484bn, or 6.8%. For the week, Currency slipped $0.1bn, while Demand & Checkable Deposits increased $7.4bn. Savings Deposits jumped $23.4bn (3-wk gain $64bn), while Small Denominated Deposits declined $3.6bn. Retail Money Fund assets rose $6.1bn.
Total Money Market Fund assets (from Invest Co Inst) jumped $22.6bn last week (9-wk gain $337bn) to a record $3.451 TN. Money Fund assets have posted a 32-week rise of $844bn (53% annualized) and a one-year increase of $1.017 TN (42%).
Asset-Backed Securities (ABS) issuance increased to $4bn. Year-to-date total US ABS issuance of $37bn (tallied by JPMorgan's Christopher Flanagan) is running only 26% of the level from comparable 2007. Home Equity ABS issuance of $197 million is a fraction of comparable 2007's $74bn. Year-to-date CDO issuance of $3bn compares to the year ago $78bn.
Total Commercial Paper increased $19.4bn to $1.860 TN. CP has declined $363bn over the past 30 weeks. Asset-backed CP declined $1.6bn (30-wk drop of $405bn) to $790bn. Over the past year, total CP has contracted $133bn, or 6.7%, with ABCP down $260bn, or 24.8%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 3/5) increased $8.6bn to a record $2.150 TN. “Custody holdings” were up $93.6bn y-t-d, or 23.7% annualized, and $302bn year-over-year (16.3%). Federal Reserve Credit expanded $6.7bn to $873.3bn. Fed Credit has contracted $199 million y-t-d, while having expanded $21.5bn y-o-y (2.5%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $1.364 TN y-o-y, or 27%, to a record $6.401 TN.
March 5 – Bloomberg (Aaron Pan): “China’s January foreign-exchange reserves rose $61.6bn to $1.59 TN, Reuters reported… If confirmed, that would be a record one-month increase.”
Global Credit Market Dislocation Watch:
March 7 – Financial Times (Michael Mackenzie and Saskia Scholtes): “A palpable sense of crisis pervades global trading floors. Not since the meltdown of the Long-Term Capital Management hedge fund in 1998 have interest rate and derivative markets suffered such a breakdown in confidence. In the past decade the scale of bond and derivative trading has expanded enormously, as global banks have provided easy access to trading for hedge funds and other investors. That source of cash has dried up as banks seek to protect their deteriorating balance sheets amid writedowns of impaired assets. Big banks have pulled back from lending to clients for trading, starting a vicious downward spiral across the mortgage, interest rate swap, municipal bond, corporate debt and global credit derivative markets. As investors have purged mortgages from portfolios, interest rate swap spreads – a barometer of bank credit risk – have surged more than a percentage point above Treasury bond yields. In the credit derivatives market, the cost of buying insurance against corporate default has hit highs in the US, Europe and Japan… Many expect the turmoil to go on for much longer than the 1998 crisis. ‘LTCM was such a transitory event compared with today,’ Mr O’Donnell said. ‘This is not just about the collapse of one entity, this is about millions of homeowners who are underwater.’”
March 7 – Bloomberg (Shannon D. Harrington): “The cost to protect corporate bonds from default reached a record for a fourth day this week as more evidence the U.S. is in a recession compounded a credit-market squeeze that has diminished companies' ability to borrow… ‘It’s just ugly,’ said Scott MacDonald, the head of research at Aladdin Capital Management…which manages $20 billion in assets.”
March 6 – BusinessWeek (Matthew Goldstein): “There’s a chill spreading across the hedge fund industry. With more portfolios falling victim to the credit crunch, managers by the dozen are freezing investor redemptions, preventing a mad rush to the exits that would force funds to sell beaten-down assets to raise cash. But is this unprecedented move just postponing the day of reckoning for funds and the market? Since November at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period. Among them: GPS Partners, a $1 billion fund that bets mainly on natural gas pipelines; Pursuit Capital Partners, a $650 million portfolio with troubled debt; and Alcentra European Credit, a $500 million fund that owns slumping loans used to finance private equity buyouts. The new rules affect not only the pension funds, endowments, and well-to-do families that buy the funds directly but also smaller individual investors exposed through diversified portfolios of hedge funds, known as funds of funds. Some hedge funds have broad powers under their contracts with investors to make such changes at their discretion. ‘It’s the largest period of redemption suspensions in the industry’s history,’ says Jonathan Kanterman, a managing director with Stillwater Capital Partners…”
March 7 – Bloomberg (David Mildenberg): “Thornburg Mortgage Inc., the home lender that’s lost 95% of its market value in the past year, may go out of business because the provider of ‘jumbo’ loans can’t meet $610 million of margin calls. Bankers have agreed to freeze their demands for payment while Thornburg tries to raise enough cash before a deadline of midnight tonight… Falling prices for mortgage assets and the company’s shrinking liquidity ‘have raised substantial doubt'' about Thornburg’s ability to keep operating, the statement said.”
March 6 – Bloomberg (Shannon D. Harrington): “The cost to protect corporate bonds from default soared to a record as hedge fund failures and rising bank funding costs stoked concern that a financial institution may collapse. Credit-default swaps tied to Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp., the nation's four biggest banks, climbed to the highest on record. A benchmark gauge of credit risk in the U.S. and Canada reached the highest since it started trading in October 2003. ‘There’s so much concern about a market failure,’ said Gregory Peters, head of credit strategy at Morgan Stanley… ‘It’s a situation where there’s just a general lack of trust and there’s a heightened fear of the unknown.’”
March 6 – Dow Jones (Deborah Lynn Blumberg): “In yet another sign of just how jittery financial markets have become again, U.S. Treasurys are just about the only security accepted in the securities repurchase market Thursday. Super-safe Treasurys are being scooped up like hotcakes and mostly on an overnight basis in the repo market, where dealers go to finance their positions by lending and borrowing securities from each other on a short-term basis. The 10-year note is the most popular thus far, with most other Treasury issues in demand as well. Other securities - such as agency debt issued by the Congressionally-chartered housing finance companies Fannie Mae and Freddie Mac - and deals to loan out any types of securities for longer than overnight were struggling. The focus on overnight loans backed by Treasurys… comes Thursday as some mortgage bond funds failed to meet margin calls, leading them to sell high quality, liquid assets to make up for the loss. That drove market participants to gravitate once again to only the safest possible securities as trust dwindled… ‘Dealers are tightening up lending standards for non-Treasury securities in the repo market,’ said Carl Lantz, fixed income strategist at Credit Suisse… noting that the financing of mortgage securities in general is becoming more difficult. Agency mortgages ‘are typically something you think of as stable,’ Lantz added, but are now becoming especially volatile.”
March 7 – The Wall Street Journal (Carrick Mollenkamp and Serena Ng): “The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back. Loans from banks and brokerages had allowed hedge funds, which manage some $1.9 trillion in clients' money, to amass many times that amount in investments. But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets. This is producing a negative cycle that has policy makers deeply worried. When investors rush to dump assets, prices fall and lenders feel compelled to make further demands, or ‘margin calls,’ which cause even more selling.” …’The appetite for risk is dropping sharply,’ said Steven Abrahams, chief interest-rate strategist at Bear Stearns… In the early stages of the financial turmoil, the riskiest securities… were hit by selling. Now, as margin calls intensify, hedge funds and others find they must unload even assets perceived as high-quality, such as bonds backed by the government-sponsored mortgage giants Fannie Mae and Freddie Mac.”
March 6 – Bloomberg (Abigail Moses, Hamish Risk and Neil Unmack): “Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates. General Electric Co. is one of five U.S. companies rated AAA… making its ability to repay debt unquestioned. Yet when the… sold 2.25 billion euros of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago… Yields on $5.12 trillion of corporate bonds tracked by Merrill Lynch & Co. average 2.05 percentage points more than U.S. Treasuries, the most since at least 1997. The higher costs are an unintended consequence of securities that allow investors to speculate on corporate creditworthiness. So-called correlation models used to value them have become unreliable in the fallout from the U.S. subprime mortgage crisis.”
March 7 – Bloomberg (Edward Evans and Cathy Chan): “Carlyle Group’s mortgage-bond fund was suspended in Amsterdam trading after creditors forced the sale of some holdings, jeopardizing shareholders' capital. Lenders who issued default notices have liquidated some residential mortgage-backed securities held by the fund and may sell more as talks continue, Carlyle Capital Corp. said… The fund had ‘substantial’ margin calls and additional default notices from lenders yesterday… Carlyle Capital said yesterday it had failed to meet margin calls, prompting creditors to seek immediate repayment… Carlyle increased its mortgage holdings last year, selling $300 million of shares in Carlyle Capital. The fund used leverage to buy about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac. ‘This marks a further savage step in the ongoing credit implosion of recent months, Keith Baird, an analyst at Bear Stears…wrote… ‘The liquidation of the fund cannot be excluded nor the potential loss of capital, rendering the shares worthless.’”
March 7 – Bloomberg (Edward Evans): “The collapse of the subprime- mortgage market has engulfed Carlyle Group, the world's second- biggest leveraged-buyout firm by assets. Carlyle Capital Corp., the firm's mortgage-bond fund, was suspended from Amsterdam trading today after it failed to repay lenders, who in turn sold assets held as collateral. The fund expects more margin calls, which may deplete capital. The pool may be liquidated and the stock left worthless, Bear Stearns Cos. analyst Keith Baird said… ‘This marks a further savage step in the ongoing credit implosion of recent months,'' Baird wrote…”
March 7 – Reuters (Laurence Fletcher): “Hedge funds under pressure from a combination of tightening credit lines, illiquid investments and investor redemptions are increasingly moving to stem investor outflows, industry experts told Reuters… An increasing number of funds are using gates -- which can typically limit investor exits to between 10 and 25% of assets per quarter. Alternatively they are suspending investor redemptions entirely so the managers don’t have to undertake a fire sale of assets in difficult markets to pay exiting investors. ‘We see a lot of situations that aren’t total write-offs but where it’s more a question of suspending dealing or a gate,’ said one fund of hedge funds manager… ‘These situations are increasing.’ Prime brokers -- who provide services such as financing for trading and settlement of trades -- have become increasingly concerned in recent months about funds, particularly in the credit area, who may be leveraged, have suffered large losses or are holding illiquid investments.”
March 6 – The Wall Street Journal (Liz Rappaport, Joellen Perry and Deborah Lynn Blumberg): “Despite repeated doses of medicine from central banks, short-term lending markets around the world are struggling again. In both Europe and the U.S., the rates that banks charge each other for short-term loans remain elevated, a sign of how cautious banks still are about using their capital. In other markets, investors are signaling distress at banks. For example, the cost to buy insurance against a bank debt default is soaring, in some cases to more than 20 times the cost last summer.”
March 6 – Bloomberg (Joseph Galante and Edward Evans): “Carlyle Group’s publicly traded mortgage bond fund failed to meet margin calls and said it received a notice of default as banks call in loans against even the highest-rated bonds… The Carlyle fund raised $300 million in July and used loans to buy about $22 billion of AAA rated agency mortgage securities issued by Fannie Mae and Freddie Mac, securities that have the ‘implied guarantee’ of the U.S. government, according to Carlyle. ‘The credit crisis is spilling over to the next asset class, agency bonds,’ said Philip Gisdakis, senior credit strategist at UniCredit SpA in Munich. ‘There’s never just one cockroach. If you see one highly leveraged hedge fund going bust, then there’s another on the way.’”
March 5 – Bloomberg (Jody Shenn): “The extra yield that investors demand to own agency mortgage-backed securities over 10-year U.S. Treasuries reached the highest since 1986… The difference in yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes widened about 12 basis points, to 215 basis points, or 79 basis points higher than Jan. 15… Some owners have been selling the debt ‘to make room for the cheaper alternatives or to lighten up because they anticipated further unraveling’ in the financial markets, UBS AG analysts led by Laurie Goodman wrote… Agency securities, which are guaranteed by government-chartered companies Fannie Mae and Freddie Mac or federal agency Ginnie Mae, were the ‘most liquid’ bonds they could sell, they wrote. Spreads are also widening as ‘hedge funds continue to de- lever,’ or scale back bond-secured borrowing… Banks and securities firms are raising the collateral they require on loans or taking other steps that discourage borrowing…”
March 4 – The Wall Street Journal (Lingling Wei): “Overwhelmed by margin calls from its creditors, home-mortgage lender Thornburg Mortgage Inc. said it has to sell assets or raise capital to stay in business. The news knocked off more than half of the market value of the company, which is structured as a real-estate-investment trust, and it dragged down shares of other mortgage lenders. It also raised fears that Thornburg would join hundreds of other nonbank home-mortgage lenders and brokers that have gone out of business over the past year. While most of the others were subprime lenders, Thornburg specializes in selling ‘jumbo’ mortgages…”
March 5 – Bloomberg (Michael McDonald): “Auction-rate bond failures show no sign of abating after investors abandoned the market for variable-rate municipal securities. Almost 70% of the periodic auctions in the $330 billion market failed this week as investment banks stopped buying the securities investors didn’t want. Yields on the debt averaged 6.52% as of Feb. 28, up from 3.63% before demand evaporated in January… ‘Even if the auction-rate market survives, we’re not going to see the kind of rates we’re used to,’ said Roger Roux, chief financial officer at Rady Children’s Hospital in San Diego, which spent an additional $940,000 on its auction bonds since rates reset as high as 15% last month.”
March 5 – Dow Jones (Michael Aneiro): “On Tuesday, a consortium of bankers gathered in New York to try to prevent an ailing Alabama municipality’s finances from disappearing down its own sewer system. Jefferson County, Ala. is in talks to refinance its sewer revenue debt, which include interest rate swap agreements it entered with four banks: Bank of America, Bear Stearns, JPMorgan Chase and Lehman Brothers. In the wake of recent credit market problems, the terms of those swaps agreements mean the county is on the hook for a $184 million collateral payment that must be made by March 7. Adding to the county’s woes, Moody’s…followed Standard & Poor’s and cut to junk status its underlying rating on Jefferson County’s $3.2 billion in outstanding sewer revenue bonds…. If the county is unable to negotiate a rescue plan this week, it could result in the largest-ever municipal default, roughly double the size of the infamous Orange County, California, debt default in 1994.”
March 3 – Bloomberg (Pierre Paulden): “Distressed debt levels have risen to the highest since August 2003 as investor fears of increased defaults amid a slowing economy fuel a flight from high-yield, high-risk assets. At the end of February about $180 billion of junk bonds, or 24.8% of the market, traded at more than 1,000 basis points above U.S. Treasuries, compared with $8 billion a year earlier, JPMorgan Chase & Co. analysts…led by Peter Acciavatti said… The dollar value of bonds that traded at or below 70 cents on the dollar is up 93% since the start of the year to $70.2 billion. Twelve companies with high-risk loans have already defaulted this year…”
March 5 – The Wall Street Journal Europe (Joellen Perry): “Fears that stalked European credit markets last year, pushing money market interest rates higher and prompting major central bank interventions, are back. Longer-term European money-market rates, elevated since the start of the year, are rising sharply. On Wednesday, rates at which euro-zone banks lend to each other for three months hit 4.398%, above the ECB’s 4% policy rate and their highest since Jan. 18… Longer-term rates are rising despite ECB policy makers’ ongoing efforts to maintain market calm in the three-month market.”
March 7 – Bloomberg (Kim-Mai Cutler and Gavin Finch): “The cost of borrowing euros for three months rose to the highest level in seven weeks, adding to evidence central bank attempts to ease a shortage of cash in the money markets are misfiring. The euro interbank offered rate, or Euribor, for the loans climbed 7 bps to 4.50% today…”
March 4 – Bloomberg (Lukanyo Mnyanda): “The difference in yield between Italian 10-year bonds and benchmark German bunds increased to the most in almost a decade as slumping stock markets prompted investors to shun all but the safest government debt.”
March 4 – Bloomberg (Lester Pimentel): “Emerging-market bond sales plunged 65% this year as mounting subprime mortgage losses dried up demand for higher-yielding debt. Developing-nation debt issuance totaled $15.5bn in the first two months of this year, David Spegel, head of emerging-markets strategy…at ING Bank NV, said…”
March 3 – Bloomberg (Hamish Risk): “Derivative trading fell 21% to $539 trillion in the fourth quarter, the biggest drop in at least 14 years, as the freeze in money markets reduced the need to hedge risks, the Bank for International Settlements said. Interest-rate futures, contracts designed to speculate on or hedge against moves in borrowing rates, led the fall in exchange- traded contracts with a 25% decrease to $405 trillion during the three months ended Dec. 31…”
March 4 – Bloomberg (Sandrine Rastello and Meera Louis): “European finance ministers said they are ‘increasingly concerned’ the euro’s advance to a record against the dollar risks deepening the economic slowdown in the region… ECB President Jean-Claude Trichet, who initially declined to comment yesterday, turned back to reporters to say that the U.S. government’s ‘strong dollar’ policy is ‘very important.’ ‘In the present circumstances, I consider very important what has been affirmed and reaffirmed by the U.S. authorities, including the secretary of the Treasury and the president of the United States of America, according to whom a strong-dollar policy is in the interests of the United States,’ Trichet said.”
The dollar index declined 0.9%, ending the week at 73.03. For the week on the upside, the Swiss franc gained 1.7%, the British pound 1.5%, the Taiwanese dollar 1.2%, the Euro 1.0%, the Danish krone 1.0%, and the Japanese yen 0.8%. On the downside, the South African rand declined 3.4%, the New Zealand dollar 1.6%, the Australian dollar 1.4%, the Mexican peso 1.2%, the Brazilian real 1.1%, and the South Korean won 1.0%.
March 5 – Bloomberg (Ron Day): “Cotton surged to the highest price in more than 12 years on escalating concern that U.S. farmers will shift acres to more-profitable crops such as wheat and soybeans. In 2008, U.S. cotton farmers may trim plantings to 9.5 million acres, a 25-year low, the U.S. Department of Agriculture said…”
Gold was little changed at $974, while Silver added 1.7% to $20.25. May Copper gained 1.7%. April Crude jumped $3.54 to a record $105.38. April Gasoline gained 0.9%, and April Natural Gas surged 4.6%. March Wheat rose 1.8%. The CRB index slipped 0.3% (up 14.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 1.9% to a new record (up 13.6% y-t-d and 56.8% y-o-y).
March 5 – Bloomberg (Li Yanping and Zhang Dingmin): “China’s Premier Wen Jiabao said the government must do more to rein in lending and curb inflation in the world’s fastest-growing major economy… ‘Financial controls need to be strengthened, and the excessively fast growth in money supply and lending should be curbed,’ Wen told almost 3,000 lawmakers in his two-hour report to the National People’s Congress…”
March 6 – Bloomberg (Li Yanping): “China’s property prices in 70 major cities jumped 11.3% in January from a year earlier, the biggest increase since at least 2005, when records began.”
March 5 – Bloomberg (William Bi and Feiwen Rong): “China, the world’s largest consumer of grains and meat, will import essential commodities, boost farm production and sell from state stockpiles to cover any food shortages and curb price gains, the government said. The country will ‘appropriately increase imports of commodities that are in short supply,’ the top economic planning body, the National Development and Reform Commission, said…”
March 5 – Bloomberg (Jason Clenfield): “Japanese corporate investment fell at the fastest pace in five years last quarter… Capital spending excluding software declined 7.3% in the three months ended Dec. 31 from a year earlier…”
Unbalanced Global Economy Watch:
March 3 – Bloomberg (Alexandre Deslongchamps): “Canada’s economy grew at the slowest pace since 2003 in the fourth quarter and contracted in December as exports declined… Growth slowed to a 0.8% annualized rate between October and December…”
March 5 – Bloomberg (Jennifer Ryan): “U.K. consumer confidence slipped to the lowest level in more than three years in February as higher food and energy costs sapped spending, Nationwide Building Society said.”
March 4 – Bloomberg (Fergal O’Brien): “European consumer spending, which accounts for almost 60% of the economy, fell in the fourth quarter for the first time in six years, curbing economic growth.”
March 3 – Bloomberg (Fergal O’Brien): “European inflation remained last month at the highest level since the euro’s debut… Consumer-price growth in the euro area was 3.2% in February… That matched January’s rate, the highest since the euro was introduced in 1999…”
March 4 – Bloomberg (Joshua Gallu): “Swiss inflation held at a 14-year high in February as a gain in the franc was unable to fully offset a surge in the cost of oil and record food prices. The inflation rate stayed at 2.4%...”
March 6 – Bloomberg (Maria Levitov): “Russia’s trade surplus almost doubled in January from the same month last year as the world’s biggest oil and gas exporter benefited from higher commodity prices. The surplus reached $19.9 billion…”
March 5 – Bloomberg (Ben Holland): “Turkey is facing a shortage of wheat and may need to boost imports, Milliyet newspaper said. The price of flour has jumped 20% in the past month and may rise another 25% because of a shortage of wheat on the market, Milliyet said citing local commodity exchanges.”
Latin America Watch:
March 6 – Bloomberg (Bill Faries): “Argentina’s main autoworkers union will seek a wage increase that is more than double the official level of inflation, Bae said. Union leaders will demand pay raises of 20% for the next three years, Buenos Aires-based Bae reported…”
March 5 – Bloomberg (Sebastian Boyd): “Chilean annual inflation accelerated to the fastest pace in 11 years in February… Consumer prices in the 12 months…rose 8.1%, up from 7.5% in the same month-earlier period.”
Central Banker Watch:
March 7 – Bloomberg (Craig Torres and Vincent Del Giudice): “The Federal Reserve moved to add as much as $200 billion to the banking system over the next month to offset a deepening credit crisis that may have already pushed the U.S. economy into a recession. The central bank raised to $50 billion each from $30 billion the amount intended for auctions of funds on March 10 and March 24. The Fed also said in a statement in Washington today that it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets including mortgage-backed bonds.”
March 4 – Bloomberg (Jacob Greber): “Australia’s central bank increased its benchmark interest rate for the second time in four weeks… Governor Glenn Stevens and his board raised the overnight cash rate target by a quarter point to 7.25%... to stem the fastest inflation since 1991.”
Bursting Bubble Economy Watch:
March 8 – Associated Press: “Dangerous cracks in the nation's job market are deepening. Employers slashed jobs by the largest amount in five years and hundreds of thousands of people dropped out of the labor force -- ominous signs that the country is falling toward a recession or has already toppled into one. For the second straight month, nervous employers got rid of jobs nationwide. In February, they sliced payrolls by 63,000, even deeper than the 22,000 cut in January, the Labor Department reported Friday. The grim snapshot of the country’s employment climate underscored the heavy toll the housing and credit debacles are taking on companies, jobseekers and the economy as a whole.”
March 4 – The Wall Street Journal (Scott Patterson and Kris Hudson): “Cracks are starting to show in commercial construction. For the second month in a row, the Commerce Department reported a decline in spending on nonresidential construction -- which includes everything from hospitals to office parks to shopping malls. The report yesterday showed U.S. construction spending fell 1.7% in January from December, the steepest drop in 14 years. While residential construction accounted for a big part of the decline, spending on nonresidential construction slid 0.8%. Meanwhile, there may be an oversupply of shopping malls and office buildings after a period of intensive construction… Nonresidential construction accounted for 3.6% of gross domestic product in the fourth quarter of 2007, up from 2.5% five years ago and the most since the second quarter of 1988, according to Moody's Economy.com.”
March 6 – Bloomberg (James Tyson): “Fannie Mae and Freddie Mac, the biggest U.S. mortgage finance companies, ‘pose potentially significant risks’ to taxpayers, a congressional watchdog said. ‘While not obligated to do so, the federal government could provide financial assistance to’ the congressionally chartered companies should they experience financial difficulties, which would cost taxpayers, William Shear, director of financial markets and community investment at the Government Accountability Office, testified today to the Senate Banking Committee.”
Mortgage Finance Bust Watch:
March 3 – The Wall Street Journal (James R. Hagerty): “Countrywide Financial Corp.'s mortgage portfolio continues to deteriorate rapidly as defaults increase and home prices fall… The… lender’s annual filing…showed a big increase in late payments on option adjustable-rate mortgages, known as option ARMs. These loans give borrowers several choices of payment each month, including one that covers only part of the interest normally due… As of the end of 2007, payments were at least 90 days overdue on 5.4% of option ARMs held as investments…up from 0.6% a year earlier… The company said 71% of the borrowers were making minimal payments. Only about a fifth of the borrowers were required to document fully their incomes before receiving the loans.”
March 5 – Bloomberg (John Brinsley): “Treasury Secretary Henry Paulson may need to revise his strategy for stemming record U.S. home foreclosures after Federal Reserve Chairman Ben S. Bernanke urged lenders to forgive portions of some loans. Bernanke’s call…went beyond a Paulson-backed plan that focuses on renegotiating interest rates. With his remarks, the Fed chief joined the heads of the Office of Thrift Supervision and Federal Deposit Insurance Corp. and congressional Democrats in proposing stronger actions than Paulson to alleviate the worst housing recession in a quarter century. ‘This puts enormous pressure on Paulson,’ said Michael Barr, a former Clinton administration Treasury official… ‘Treasury’s response so far has been insufficient.’ …Bernanke’s speech highlighted a deepening threat from house prices dropping below mortgages, something Paulson played down the day before.”
March 6 – Bloomberg (Jody Shenn): “Citigroup… plans to pare its U.S. residential unit’s mortgage and home-equity holdings by about $45 billion, or 20%, over the next year. The Citigroup division will decrease its total holdings mainly by making fewer loans that can’t be sold…”
March 4 – Financial Times (Peter Thal Larsen and Jane Croft): “Just over three years ago Sir John Bond, then chairman of HSBC, presented the bank’s board of directors with a detailed analysis of its track record on acquisitions. His conclusion: although HSBC had made some mistakes, its large acquisitions had generally been successful. It is probably just as well that Sir John, who stepped down in 2006, is no longer around. Because any similar presentation to HSBC’s board today would have to start with an admission that the bank’s largest-ever deal - the $15bn acquisition of Household, the US consumer finance group - has been a colossal failure. Yesterday HSBC spelled out the damage it had suffered from its foray into lending to US consumers… Its North American division, which includes Household, set aside $12.2bn for bad loans last year…”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
March 6 – Bloomberg (Kathleen M. Howley): “U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said… New foreclosures jumped to 0.83% of all home loans in the fourth quarter from 0.54% a year earlier. Late payments rose to a 23-year high… ‘We’re seeing people give up even before they get to the reset because they couldn’t afford the home in the first place,’ said Jay Brinkmann, vice president of research and economics for the [MBA]…”
March 4 – Reuters (Al Yoon): “Bonds backed by U.S. office buildings and hotels suffered their worst month ever in February as investors girded for falling property prices and rising defaults, according to Lehman Brothers… CMBS lost 3.74% in February… Rising delinquencies in commercial real estate has prompted investors, already burned by flare-ups in residential real estate, to flee the $750 billion market that funds office buildings, hotels and shopping malls. Forecasts of a 20% drop in commercial property values by Moody’s…and…JPMorgan Chase… have fueled a frenzy of selling in derivative indexes…”
Real Estate Bubble Watch:
March 5 – The Wall Street Journal (Dawn Wotapka and Marshall Eckblad): “In the nation’s worst-hit real-estate markets, home sellers are suffering a new blow: They are being blacklisted by lenders. As property values decline and credit markets contract, home lenders nationwide are growing ever more unwilling to finance home purchases in sharply declining housing markets, driving prices down further. In some cases, lenders have ruled out entire geographic regions and property types altogether… There are ‘lists circulating’ from banks, says Peter Zalewski, a broker with Condo Vultures Realty LLC, and those lists are pushing down prices when news of the black-marked properties spreads.”
March 5 – Bloomberg (Christopher Scinta): “Simplon Ballpark LLC, a San Diego- based real estate development company, filed for Chapter 11 bankruptcy in its hometown… Simplon Corp… is building a 334-unit, 35-story condominium tower on the San Diego waterfront known as Cosmopolitan Square that overlooks Petco Park, the home of Major League Baseball’s San Diego Padres.”
March 5 – Dow Jones (Michael Aneiro): “As Jefferson County, Ala., continues efforts to avoid bankruptcy, an Alabama official said Wednesday that there is no state-level mandate for a bailout should the county default on its debt. ‘To my knowledge, there is no statutory system or scheme that would cover a situation of this type that relates to the state serving as a backstop,’ said Ken Wallis, chief chief legal advisor to Alabama governor Bob Riley.”
March 5 – Bloomberg (William Selway): “California, the largest seller of municipal bonds, is moving to help hospitals saddled with soaring borrowing costs on variable interest-rate bonds refinance their debts. The California Health Facilities Financing Authority, a state agency that raises money on behalf of hospitals in the most-populous U.S. state, will meet March 11 to review applications by borrowers wanting to exit costly auction-rate and variable-rate bonds… Six borrowers have reserved spots to consider $4.6 billion of their debt. It is the second effort in as many days by California authorities to help local governments and other municipal borrowers escape from soaring interest payments.”
March 4 – Bloomberg (Brian Faler): “The U.S. budget deficit will widen this year to at least $357 billion, the most since 2004, as the economic stimulus package drains tax revenue from the Treasury, according to the Congressional Budget Office. The shortfall will prove even larger if lawmakers approve President… Bush’s pending request for an additional $100 billion this year for the wars in Iraq and Afghanistan… The CBO estimate is 63% higher than the one it issued in January…”
March 4 – Bloomberg (Adam L. Cataldo): “New York City will cut another 3% from its 2009 budget if the state fails to provide previously anticipated aid and revenue. City agencies have been asked to identify reductions if New York state fails to include $747 million in its proposed 2009 budget that New York officials say they were promised. In January, Mayor Michael Bloomberg proposed a spending plan of $58.5 billion that included a 5% cut in spending… New York Governor Eliot Spitzer… proposed a $126.5 billion budget that helped close a $4.4 billion gap by reducing outlays for the city.”
March 4 – Associated Press (David Royse): “Lawmakers began their 2008 session with Florida mired in an economic slump that leaders said would make their work in the next two months some of the most important in recent times. In an opening speech Tuesday that was equal parts gloom and brash talk about the way forward, Speaker Marco Rubio noted that the state’s real estate market is ‘in complete collapse,’… Rubio said next week lawmakers expect to find out that incoming tax collections will be almost $4 billion -- about 13% -- less than estimated just a year ago.”
March 7 – Bloomberg (Adam L. Cataldo): “The New Jersey fund responsible for school employee pensions is short $12.4 billion for estimated future payments. he Teachers’ Pension and Annuity Fund saw its so-called unfunded liability increase by about $1.4 billion as of June 30… The figure represents a 13% from $11 billion for the fiscal year ended June 30, 2006.”
March 5 – Bloomberg (Tom Cahill and Katherine Burton): “Peloton Partners LLP, the London- based firm that’s liquidating its largest hedge fund after ‘severe’ losses, probably will have no money left after creditors are paid, co-founder Ron Beller told investors… ‘The lesson is don’t take on too much leverage and buy on margin without enough cash for when times get tough,’ said Odi Lahav, head of the European Alternate Investment Group at Moody’s… The fund held about $17 billion of long positions in ABX indexes tied to subprime mortgages…; AAA rated subprime-backed securities; and Alt A mortgages…people said. The fund was short $6 billion of lower-rated mortgage securities.”
Crude Liquidity Watch:
March 2 – Bloomberg (Matthew Brown): “Saudi Arabia’s M3 money supply growth, an indicator of future inflation, accelerated to 24% in January from 20% in December.”
March 5 – Bloomberg (Matthew Brown): “Food inflation in the United Arab Emirates could accelerate by 40% this year, Gulf News reported, citing the Emirates Consumer Protection Society.”
Q4 2007 Flow of Funds:
For the year, Total Credit (Non-Financial and Financial) expanded a record $3.998 TN (8.9%) to $48.808 TN. This was a moderate increase from 2006’s growth of $3.859 TN (9.4%), and compares to 2005’s $3.310 TN, 2004’s $3.178 TN, 2003’s $2.779 TN, 2002’s $2.781 TN, 2001’s $2.020 TN, and 2000’s $1.679 TN. Total Credit Market Debt averaged $2.500 TN annual growth over the 10-year period 1997 to 2006. Non-Financial Credit increased $2.351 TN (8.1%) in 2007, compared to the previous year’s $2.334 TN. Financial Credit surged $1.569 TN (11.1%), up from 2006’s $1.273 TN (9.9%) and 2005’s $1.015 TN (8.5%). It is worth noting that Financial Sector Credit growth averaged about $500bn annually during the nineties.
In true Bubble blow-off fashion, total Corporate debt expanded at a 12% annualized rate during the fourth quarter, with 2007's growth of 11.6% the strongest since 1998. Now that Bubble has burst as well. We’re now poised for a year of significantly slower debt growth – a serious dilemma for both the highly over-leveraged financial sector and the deeply mal-adjusted U.S. Bubble Economy. The negative effects to the real economy from a lack of Credit are becoming increasingly evident.
Bursting Credit Bubble dynamics were certainly discernible in Q4 data. Financial Sector Debt growth slowed sharply from Q3’s 15.7% rate to a somewhat more moderate 9.0%. The previously hot Asset-Backed Securities (ABS) sector hit the wall, contracting at a SAAR (seasonally-adjusted and annualized rate) $282bn – for perhaps the first ever quarter of negative ABS growth. Recall that ABS expanded a record $773bn during 2006 (24%). And the Securities Broker/Dealers contracted SAAR $701bn during Q4, after expanding a record $615bn (28.9%) during 2006. REITs posted negative growth for the quarter, as did Finance Companies. In the real economy, Total Compensation expanded at a 4.1% rate during Q4, down notably from Q3’s 6.3%, Q2’s 6.2%, Q1’s 6.0%, and Q4 ‘06’s 6.5%. The interplay between weakening Credit dynamics and income growth will be of major consequence this year and going forward.
Of course, the root of the problem can be traced to faltering real estate finance. Total Mortgage Debt (TMD) growth slowed to SAAR $864bn during Q4 (5.9% rate), down sharply from Q3’s SAAR $1.050 TN (7.7%) and Q2’s SAAR $1.208 TN (9.2%). Home Mortgage Debt growth slowed to a 4.5% annual pace, down from Q3’s 6.5% and Q2’s 7.9%. Even the booming Commercial Mortgage sector slowed markedly, with the 9.3% rate down from Q3’s 11.2% and Q2’s 15.0%. We can safely forecast that these numbers will “fall off a cliff” during Q1.
For all of 2007, TMD growth slowed to $1.057 TN (7.8%), down from 2006’s $1.404 (11.6%), 2005’s $1.432 TN (13.4%), 2004’s $1.270 TN (13.5%), 2003’s $996bn (11.9%), 2002’s $905bn (12.1%), 2001’s $708bn (10.4%), and 2000’s $561bn (9.0%). TMD averaged $268bn annually during the nineties. I’ll throw out a guess of less than $500bn of TMD for 2008, a number greatly insufficient to sustain still inflated home values. And while home prices captivate the media, an abrupt shut down in commercial mortgage Credit is in the process of a rather problematic bursting of commercial real estate price Bubbles as well.
Bank Mortgage loans actually expanded at a 13.5% rate ( SAAR $510bn) during the quarter to $3.633 TN. Total Bank Credit expanded at a 13.8% rate ( SAAR $1.270TN) during Q4 to $9.163 TN. Along with Mortgages, commercial Loans expanded at a 23.6% pace to $2.012 TN ( SAAR $474bn). The asset Security Credit jumped SAAR $108bn, and Corporate & Foreign Bonds rose SAAR $225bn. Treasury Securities increased SAAR $48bn, while Agency and GSE Securities contracted SAAR $225bn. Whether by choice or, more likely, necessity, the banking sector significantly increased its risk asset holdings at an inopportune time. For the year, Bank Credit expanded a record $992bn, or 9.7%, the strongest pace of expansion in 10 years.
With the market for “private-label” mortgage securities dislocating (see ABS analysis), the GSEs were left to take up the slack. Agency MBS expanded SAAR $784bn to $4.443 TN, a record showing. The fourth quarter's 18.8% expansion increased 2007 Agency MBS growth to 15.8%, double the pace from 2006. In fact, last year's $606bn increase in Agency MBS was approaching double the previous record increase ($338bn) set back in 2001. Meanwhile, GSE Assets (as opposed to MBS guarantees) expanded at a 12.9% rate during the quarter to $3.183 TN. For the year, GSE assets expanded $310bn (10.8%), up significantly from 2006’s $56bn (1.9%) to the largest expansion since 2001 ($344bn). Federal Home Loan Bank System (FHLB) Advances jumped by more than a third last year to $873bn. Total agency securities (debt and MBS) issuance surged to SAAR $1.128 TN during Q4, with 2007's $888bn issuance almost three times the volume from 2006 ($331bn) and more than 10 times 2005 ($83bn). It was not a good time for the highly leveraged and exposed GSEs to significantly increase their risk profiles.
The ABS Bubble came to an abrupt conclusion during Q4. After expanding at a 24.4% pace during Q4 2006, growth slowed to 10.6% during Q1, 12.1% in Q2, 0.9% in Q3 and then a contraction of 6.1% during Q4. For the year, ABS growth slowed markedly to 4.4% ($177bn), ending the year with outstandings of $4.221 TN. Last year's growth was down sharply from 2006’s 23.6% ($773bn) growth, 2005’s 25.8% ($671bn), and 2004’s 19.6% ($426bn). Importantly, the ("Wall Street-backed") ABS market ballooned $2.47 TN in four years, or 94%. This historic issuance of fundamentally weak Credits - at the finale of a prolonged Credit Bubble - will haunt our system for years to come.
Securities Broker/Dealer assets contracted SAAR $701bn during the quarter to $3.095 TN. This reduced 2007 growth to $354bn, or 12.9%. This was down from 2006’s record $615bn (28.9%) expansion. Broker/Dealer assets ballooned 132% in five years. For the year, the asset Credit Market Instruments grew 40% to $815bn. Agency/MBS holdings doubled to $278bn. Corporate bonds increased $43bn, Security Credit $33bn, and Misc. Assets $35bn. On the Liability side, Security Repos increased $79bn to $1.151 TN. Due to Affiliates was little changed at $901bn.
Taking up the slack from faltering Wall Street securitization markets, Money Market Funds expanded an unprecedented SAAR $820bn during Q4 to $3.053 TN. For the year, Money Funds rose $740bn, or 32%. Examining the increase in asset categories, Repos increased $175bn (44%) to $570bn, Open-Market Paper $103bn (17%) to $711bn, Treasuries $95bn (115%) to $178bn, Municipal debt $103bn (28%) to $474bn, and Agency obligations $81bn (61%) to $212bn. Corporate bond holdings were little changed for the year at $377bn.
Examining various other Financial Sector categories, Fed Funds and Repos declined at a 31% rate during Q4 to $2.571 TN. This reduced 2007 growth to $77.5bn (3.1%), down sharply from 2006’s $496bn (25%) expansion. Savings Institutions reduced assets at an 11.4% pace during Q4 to $1.815 TN, reducing 2007 growth to 5.8%. REIT liabilities contracted at a 9.0% rate during Q4 to $588bn. REITs liabilities were down $33bn during 2007 (6%), after expanding $93bn during 2006. Finance Company assets contracted at a 2.6% rate during Q4 (to $1.911TN), reducing 2007 growth to 2.9%. Credit Unions expanded at a 5.3% pace during Q4 (to $759bn) and 6.0% for the year.
As always, the Household (and non-profit) Balance Sheet provides invaluable Credit Bubble insight. For the first time since 2002, Household Assets actually declined ($308bn) during the quarter. Both Real Estate ($95bn) and Financial Asset ($254bn) values fell, although this decline was quite moderate compared to what will unfold this year. And with Household Liabilities increasing $225bn, Household Net Worth actually declined $533bn during Q4. For all of 2007, Household Assets increased $2.838 TN (4.1%) to $72.093 TN, while Liabilities rose $920bn (6.8%) to $14.375 TN. Net Worth increased $1.918 TN for the year to $57.718 TN. This was, however, less than half the annual average Net Worth inflation of $4.207 TN that had fueled the Bubble Economy during the previous four year boom. The downside of the Credit Bubble will have Households taking on additional debt (though at a slower pace), as asset values decline precipitously. Evaporating Net Worth is now having a meaningful impact on confidence, consumption and investment decisions, and this effect will only escalate over the coming weeks and months.
And when it comes to Credit Bubble analysis, the Rest of World (ROW) page in the Fed’s Z.1 “Flow of Funds” report is actually the one I contemplated the most (and with the greatest unease) this week. ROW increased holdings of U.S. Financial Assets by $1.573 TN last year, or 11.4%. With the Bursting of the Credit Bubble and the resulting impairment of U.S. securities, such growth has become unsustainable. ROW holdings of U.S. Financial Assets were up an astounding $7.222 TN, or 88%, in just four years. ROW more than doubled holdings of Agency/GSE MBS ($1.379 TN) and almost doubled Corporate Bonds/ABS ($2.583 TN) position since the beginning of 2004. Security Repo holdings grew from $460bn to $1.100 TN. U.S. Equities almost doubled (94%) to $2.806 TN. Total Credit Market Instrument positions were up 79% over four years to $6.855 TN.
During the fourth quarter alone, ROW holdings of U.S. Credit Market Instruments expanded at a SAAR $1.045 TN. Interestingly – and a much less than “bullish” dynamic - the composition of assets acquired changed markedly. Treasury and Agency purchases accounted for 62% of purchases, up from about 15% during Q3. And with the international banking community now in full retreat away from U.S. structured finance and risk assets, the ROW’s stalwart increase in U.S. “Misc. Assets” and Corporate Bonds is surely in serious jeopardy.
Today, with Treasury yields having collapsed, Agency securities having lost their luster, and even investment grade corporates heavily tarnished, it is not at all clear as to which U.S. financial assets today hold sufficient appeal to our foreign Creditors. It is anything but obvious as to how we will now sustain a smooth “recycling” of our massive Current Account Deficits. And I certainly don’t believe it is any coincidence that the recent alarming widening in agency debt and MBS risk premiums has occurred concurrently with the acceleration in dollar weakness.
I will continue to examine the stark contrasts between the current Post-Bubble “reflation” attempt and those that preceded it. When the seemingly irrepressible Bubble in Wall Street finance was inflating, aggressive Federal Reserve rate cuts fed quickly into speculative leveraging; heightened demand for securitizations; aggressive lending in the asset markets; asset inflation; and the inflation (of volume and prices) of myriad Credit instruments with perceived limited liquidity and Credit risk (certainly including ABS, MBS and agency debt, along with more sophisticated Wall Street debt instruments and structures). The Fed didn’t really need to concern itself with the dollar. Not only were foreign financial institutions rushing in to play the boom in U.S. “structured finance”, the U.S. Credit system was creating perceived “money”-like securities that were the envy of the world. As fast as our Trade Deficits and speculative outflows flooded the world with dollar liquidity, this finance would return to find a perceived “safe and secure” home through various Monetary Processes right back into our asset-based securitization markets. It was a Bubble of historic proportions and it’s all laid out on the L.107 page in the Fed’s Z.1 report.
We haven’t heard much of the “Bretton Woods II” nonsense lately. Somehow, everyone wanted to make believe that we would always enjoy the luxury of trading endless new securities for imported energy, commodities, capital equipment, cheap electronics, and all the consumer goods we could ever dream of. The problem was that our Credit system was issuing ever larger quantities of increasingly suspect financial claims (well documented in the Fed’s “Flow of Funds”). Well, the entire world has become aware of our situation and will be less than keen to accumulate more of our debt. The Fed’s willingness to cut rates so drastically in the midst of faltering confidence and heightened inflationary pressures is certainly exacerbating the very dangerous dislocation that has erupted in the agency, MBS and investment-grade corporate markets.