Saturday, November 8, 2014

Weekly Commentary, March 9, 2012: Now, Sterilized QE

For such a tiny economy, Greece has had quite an impact. Today’s Greek bond swap marks the largest sovereign debt restructuring in history – the first default by a developed nation since WWII. Along the way, agreement after agreement was left in tatters. Trust in policymaking was broken, from the standpoint of both fiscal and monetary management. The rule of law was sacrificed. Ditto for the sound money credentials of the world’s preeminent central bank, the ECB. Confidence in European policymakers and the euro was greatly diminished. Democracy was weakened. Despite the triggering of Credit default swap (CDS) contracts, the credibility of this enormous marketplace has been left tarnished. Faith in sovereign debt – the bedrock of global finance - has taken a serious blow. Latent animosities between countries, cultures, societies, political parties, policy viewpoints and economic doctrines were unleashed. The euro 100bn ($130bn) write-down of Greek debt is but a small fraction of the true and ongoing cost of the Greek debt fiasco.

Ok, if things are such a mess, how can global markets remain so sanguine? Well, the Greek/European debt crisis also confirmed that no longer are there any bounds with respect to global central bank market interventions and liquidity operations. With the ECB now fully aboard, they’re all on board. And the worse things get the more convinced market participants are in the dependability of the global central bank liquidity backstop. Too big to fail has soared to new global heights. The Fed has even indicated a willingness to further push its monetary experiment in the face of strong markets, decent economic growth and heightened inflationary pressures. And I could only chuckle yesterday when reading the Bloomberg headline: “Draghi Lays Groundwork for ECB Exit as Inflation Takes Spot Light.” I’m sorry, but the same comment holds for the ECB (and BOE, BOJ, PBOC, etc.) that I have directed to Federal Reserve policy: “There’s No Exit.”

March 7 – Dow Jones (Richard Barley): “Central banking has become a global growth industry. But it is not just the size of balance sheets that's changed: so too have their composition. With rates close to zero, the U.S., U.K., Japanese and European central banks have pumped cash into the financial system. But each has chosen a different method - and will face different challenges when they try to shrink again. The growth in balance sheets has been startling: the combined assets of the four central banks will top $9 trillion by the end of March compared to $3.5 trillion five years ago, Deutsche Bank says. The European Central Bank's EUR3 trillion balance sheet is the biggest relative to the economy, at 32% of nominal euro-zone GDP, followed by the Bank of Japan with 24%, the Bank of England with 21% and the Federal Reserve with 19%. The BOE's balance sheet has expanded fastest in the crisis, more than tripling to GBP321 billion. But the change in composition and maturity profile of the balance sheets has been equally noteworthy. In January 2007, the Fed held $779 billion of U.S. Treasurys, of which 52% matured in under a year and only 19% in more than five years. Now, it holds $1.65 trillion of Treasurys, of which 57% mature in more than five years. Of the BOE’s GBP255 billion face value of gilts, 72% mature in more than five years, with 26% maturing in more than 20 years.”

The history of inflationism is starkly clear: once inflationary dynamics attain a foothold, they secure powerful vested interests and become increasingly beyond control. Indeed, contemporary central banks are in the process of learning the same hard lessons learned by scores of governments and currency systems over generations: once the printing press gets cranked up, it becomes virtually impossible to turn down. Hope that monetary inflation will be contained (“just one final bout of stimulus”) leads invariably to increasing desperation and runaway inflation and debasement. And while traditional Credit inflation (currency printing) fueled distortions and rising prices foremost in the real economy, today’s brand of (electronic Credit and Central bank liquidity) inflationism has its greatest impact on interlinked electronic global financial markets. Whether they appreciate it or not, policymakers are today completely enveloped by a global whirlwind of speculative excess.

Global central bankers, in particular, have a historic financial mania by the tail. And I don’t believe the Wednesday morning timing of Jon Hilsenrath’s (WSJ) “sterilized QE” article was coincidental. Tuesday the markets had suffered their worst trading day of the year. Global equities were under heavy selling pressure, European bond yields were moving higher, U.S. fixed income was unsettled and the dollar was catching a strong bid. In a financial world that has regressed to “risk off” or “speculation on,” the latest speculative Bubble in global risk markets was showing its vulnerability. And with Greece hanging in the balance, there was little tolerance for un-bullish markets.

Fortunately for the bulls, “risk off” was quickly nipped in the bud with the revelation that key members of the Fed have been hard at work devising clever mechanisms to expand its quantitative easing program. If political pressure is too intense to boost Treasury debt holdings, simply shift to more politically-palatable mortgage-backed securities (MBS). And now, if the economic and inflationary backdrop is adverse to additional Federal Reserve Credit, why not just buy additional long-dated Treasuries with the promise to simultaneously sell (“sterilizing”) short-term instruments. This would allow the Fed to retain a mechanism to backstop the bond and securities markets (great for bullish market psychology!), while countering its critics with the argument “it’s not inflationary!”

This is all in the nature of inflationism: A slippery slope of intervention, obfuscation, rationalization and degradation. And, in the end, there will be no way out for policymakers. Yet, for now, the markets are more than content. From Hilsenrath’s article: “The Fed believes that reducing the amount of long-term bonds in the hands of investors drives down long-term interest rates, encourages more risk-taking, and thus spurs spending and investment by households and businesses.” The Bernanke Fed has convinced itself that it has fundamental responsibility to inflate bond, equities and risk asset prices. In Europe, the ECB has moved aggressively to inflate bond prices, especially those of Spain and Italy. All the while policymakers apparently fail to appreciate that unprecedented global central bank market interventions are leading to dangerous speculation throughout global markets - heightened market excesses that create susceptibility to waning confidence in the efficacy of liquidity backstops and aggressive policy interventions. Policy has for too long targeted the markets, and the marketplace has grown hopelessly dependent.

For now, the markets are betting that no serious impediments exist to ongoing global central bank largess. Here at home, the view is that Bernanke is steadfast and ingenious – one could argue covertly authoritarian - and that his critics remain powerless and out of mainstream economics. After this week, the markets are only more emboldened that Chairman Bernanke is keen to intervene at the first sign of trouble. Perhaps not within the voting ranks of FOMC, but the Federal Reserve system is both divided on policy and susceptible to harsh criticism.

At the ECB, President Draghi went to extraordinary lengths at his Thursday press conference to convince the world that the ECB and Bundesbank are on the same page. This followed several reports that German central bankers have serious issues with measures taken by the Draghi ECB. A letter questioning policy sent by Bundesbank President Jens Weidmann to Mr. Draghi was leaked to the press. And former ECB board member Juergen Stark was quoted as saying, “The balance sheet of the euro system isn’t only gigantic in size but also shocking in quality.” Despite the smiles and comforting words, Draghi and the Germans don’t see eye to eye – and the markets face the prospect of a much more constrained ECB. For now, however, the markets are focused on the time bought with a Trillion plus of newly “minted” liquidity resting on the European banking system balance sheet. I won’t be surprised that the ECB in hindsight regrets that it didn’t limit the scope of the LTROs, while wishing it had retained more firepower for later. The European debt crisis certainly did not end with tiny Greece’s giant restructuring.

LTRO has not altered my view that the euro doesn’t make it. Actually, it seems to me that $1.3 TN of additional bank liquidity has upped the ante. If serious worries reemerge with respect to structural debt and economic problems in, say, Portugal, Spain or Italy, those banking systems may be viewed as only more vulnerable after boosting sovereign debt exposures. LTRO may have goosed the markets, yet European economies continue to really struggle. And after recent liquidity measures have run their course, for me it still comes back to the fundamental issue of how such divergent economic structures and sovereign nation states (that don’t seem to like each other and have demonstrated they don’t work well together) can share a common currency – i.e. how do the Spanish, Italians, French, Germans and others manage the myriad and complex political, economic, financial and monetary issues in support of a sound euro?

And if a weak euro lends support to a resurgent U.S. currency, what does this mean for global risk markets that over years have become reliant upon ongoing dollar devaluation? Friday was notable for the dollar’s favorable response to strong payroll data. Stock prices, for a change, were not bothered by dollar buoyancy. Are stock prices “decoupling” from currency market worries? Or was it more a case of the dollar gaining much of its headway against the euro and yen – with the favored “developing” and “commodities” currencies for the most part holding their own? Is the U.S. economic expansion “decoupling” from a global slowdown? I can’t help but to believe that the backdrop is nurturing fragilities – global market risk to a dollar rally; risk to another bout of faltering euro confidence; market vulnerability to a surprising jump in bond yields; risk to surging oil and gas prices; fragilities associated with a highly speculative U.S. stock market. Truth be told, I guess I just don’t buy into the notion that unprecedented ongoing market intervention and egregious inflationism somehow avoid their comeuppance.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” Do the Keynesians ever deeply, seriously contemplate perhaps Keynes’ greatest - and certainly most pertinent - monetary insight?

For the Week:

The S&P500 was little changed (up 9.0% y-t-d), while the Dow slipped 0.4% (up 5.8%). The broader market was stronger. The S&P 400 Mid-Caps added 0.8% (up 12.0%), and the small cap Russell 2000 recovered 1.8% (up 10.3%). The Morgan Stanley Cyclicals gave back 1.0% (up 15.4%), while the Transports were about unchanged (up 2.8%). The Morgan Stanley Consumer index was unchanged (up 3.1%), while the Utilities increased 0.5% (down 3.0%). The Banks were up 0.3% (up 16.1%), and the Broker/Dealers were 0.5% higher (up 22.4%). The Nasdaq100 was up 0.2% (up 16.2%), and the Morgan Stanley High Tech index gained 0.2% (up 16.7%). The Semiconductors increased 0.6% (up 16.0%). The InteractiveWeek Internet index added 0.3% (up 11.7%). The Biotechs slipped 0.5% (up 21.1%). Although bullion was little changed, the HUI gold index fell 2.6% (up 2.2%).

One-month Treasury bill rates ended the week at 5 bps and three-month bills closed at 8 bps. Two-year government yields were up 4 bps to a seven-month high 0.32%. Five-year T-note yields ended the week up 6 bps to 0.90%. Ten-year yields rose 5 bps to 2.03%. Long bond yields jumped 8 bps to 3.18%. Benchmark Fannie MBS yields increased 2 bps to 2.88%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 3 bps to 85 bps. The implied yield on December 2012 eurodollar futures rose 4 bps to 0.53%. The two-year dollar swap spread increased one to 25.75 bps. The 10-year dollar swap spread declined about one to 8 bps. Corporate bond spreads widened somewhat. An index of investment grade bond risk increased 1.5 to 95.5 bps. An index of junk bond risk widened 24 to 575 bps.

It was the strongest week of debt issuance ($50bn plus) since last May. Investment grade issuers included Phillips 66 $5.8bn, Hewlett-Packard $2.0bn, DirecTV $5.0bn, Xerox $1.1bn, URS $1.0bn, Newmont Mining $2.5bn, PNC $1.0bn, Wynn Las Vegas $900 million, Genworth $750 million, Marriot International $600 million, Silgan $500 million, Hexion $450 million, Progress Energy $450 million, Southern Cal Edison $400 million, Con Ed New York $400 million, Masco $400 million, Omega Healthcare Investors $400 million, Domtar $300 million, Mississippi Power $550 million, Marsh & McLennan $250 million, and Western Group $185 million.

Junk bond funds saw inflows increase to $957 million (from Lipper). A notably long list of junk issuers included Coca-Cola $2.75bn, Centurylink $2.05bn, Simon Properties $1.75bn, CHS/Community Health Systems $1.0bn, Kinder Morgan Energy Partners $1.0bn, Continental Airlines $900 million, Continental Resources $800 million, American Tower $700 million, Fidelity National $700 million, Concho Resources $600 million, Berry Petroleum $600 million, EV Energy Partners $500 million, Bill Barrett Corp $400 million, Covana $400 million, DCP Midstream $350 million, Verso Paper $345 million, Ofice Depot $250 million, and Key Energy Services $200 million.

Convertible issuance included $875 million and Helix Energy Solutions $200 million.

International dollar bond issuers included Toronto Dominion Bank $3.0bn, Mexico $2.0bn, Mitsui Sumitomo Insurance $1.3bn, Oversea-Chinese Banking $1.0bn, Commonwealth Bank Australia $2.5bn, Philips Electronics $1.5bn, BE Aerospace $500 million, Hyundai $500 million, Berau Coal Energy $500 million, Orix $500 million, Bombardier $500 million, Masonite International $375 million and Salta $185 million.

Ten-year Portuguese yields declined 10 bps to 13.35% (up 58bps y-t-d). Italian 10-yr yields ended the week down 7 bps to 4.82% (down 221bps). Spain's 10-year yields rose 9 bps to 4.98% (down 6bps). German bund yields slipped one basis point to 1.79% (down 3bps), and French yields declined 2 bps to 2.88% (down 25bps). The French to German 10-year bond spread narrowed a basis point to 109 bps. Greek two-year yields ended the week up 1,084 bps to 217.38% (up 9,184bps). Greek 10-year yields declined 73 bps to 32.604% (up 129bps). U.K. 10-year gilt yields rose 2 bps to 2.15% (up 18bps). Irish yields were 2 bps higher at 6.83% (down 143bps).

The German DAX equities index slipped 0.6% (up 16.6% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.985% (unchanged). Japan's Nikkei rose 1.6% (up 17.4%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index declined 1.6% (up 17.5%), and Mexico's Bolsa fell 1.7% (up 1.7%). South Korea's Kospi index slipped 0.8% (up 10.5%). India’s Sensex equities index declined 0.8% (up 13.3%). China’s Shanghai Exchange declined 0.9% (up 10.9%). Brazil’s benchmark dollar bond yields fell 7 bps to 3.00%.

Freddie Mac 30-year fixed mortgage rates dipped 2 bps to 3.88% (down 100bps y-o-y). Fifteen-year fixed rates declined 4 bps to 3.13% (down 102bps). One-year ARMs added one basis point to 2.73% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 4 bps to 4.67% (down 78bps).

Federal Reserve Credit declined $43.3bn to $2.865 TN. Fed Credit was up $318bn from a year ago, or 12.5%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 3/6) rose $1.7bn to $3.461 TN (5-wk gain of $51bn). "Custody holdings" were up $65bn year-over-year, or 6.2%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $904bn y-o-y, or 9.7% to $10.269 TN. Over two years, reserves were $2.45 TN higher, for 31% growth.

M2 (narrow) "money" supply declined $3.7bn to $9.785 TN. "Narrow money" has expanded 9.0% annualized year-to-date and was up 9.7% from a year ago. For the week, Currency increased $2.6bn. Demand and Checkable Deposits fell $6.5bn, while Savings Deposits increased $3.8bn. Small Denominated Deposits declined $3.9bn. Retail Money Funds added $0.3bn.

Total Money Fund assets declined $7.0bn to $2.645 TN. Money Fund assets were down $50bn y-t-d and $105bn over the past year, or 12.9%.

Total Commercial Paper outstanding slipped $1.6bn to $926bn. CP was down $34bn y-t-d and $137bn from one year ago, or down 1%.

Global Credit Watch:

March 9 – Bloomberg (Maria Petrakis and Rebecca Christie): “Greece pushed through the biggest sovereign restructuring in history after cajoling private investors to forgive more than 100 billion euros ($132bn) of debt, opening the way for a second bailout. Euro-region finance ministers agreed on a conference call that the swap meant Greece had met the terms to proceed with a 130 billion-euro rescue package designed to prevent a collapse of the Greek economy. Ministers freed up 35.5 billion euros in public sweeteners and interest now, with a decision on the balance to be made at a March 12 meeting in Brussels. ‘It would be a big mistake to think we are out of the woods,’ German Finance Minister Wolfgang Schaeuble told reporters… ‘We have a chance of making it. And we have to seize that opportunity.’”

March 9 – Bloomberg (Abigail Moses): “Greece’s use of collective action clauses forcing investors to take losses under its debt restructuring triggers payouts on $3 billion of default insurance, the International Swaps & Derivatives Association said. A total 4,323 credit-default swap contracts may now be settled after ISDA’s determinations committee ruled the use of CACs is a restructuring credit event… Swaps traders will hold an ‘expedited’ auction March 19 to ‘maximize’ the number of bonds that can be used to set payout amounts on the contracts… Auctions, which set a recovery value on the underlying bonds, typically are held about a month after credit events are triggered. A swaps trigger ‘raises the question of which country is next and which banks are most exposed,’ Hank Calenti, a bank analysts at Societe Generale SA in London, wrote…”

March 8 – Bloomberg (Rebecca Christie and Simon Kennedy): “Greece’s day of reckoning with bondholders dawns with economists from Barclays Capital to Deutsche Bank AG concerned that the world’s largest debt restructuring will provoke aftershocks. Eight months of negotiations reach a head with today’s deadline for private creditors to accept a bond swap aimed at writing off 106 billion euros ($140 billion) of Greek debt… Possible repercussions include a surge in borrowing costs for other indebted nations as investors refuse to lend to countries that may follow suit in imposing losses on bondholders. The accord may also trigger derivatives designed to insure against default, and may not be enough to prevent Greece from reneging on its debts in the coming years. ‘We have to be on alert for all kinds of potential risks surrounding this,’ said Julian Callow, head of international and European economics at Barclays Capital… ‘We are in such unknown territory here by the sovereign debt standards of advanced economies that we have to pay attention.’”

March 5 – Bloomberg (Anchalee Worrachate): “The exemption of the European Central Bank from losses on its Greek bond holdings may lead to smaller payouts for investors in other euro-area debt in case a similar restructuring is required, JPMorgan Chase & Co. says. ‘The escape of the ECB and national central banks from losses highlighted that private sector holders of euro-area government bonds are de facto subordinated to official sector holders,’ wrote JPMorgan analysts including… Nikolaos Panigirtzoglou. ‘This has implications for the write-down on euro-area government bonds in the event of a restructuring.’ Investors of Portuguese bonds may have to assume as much 68% losses if they are asked to participate in a debt swap in a Greek-style private-sector involvement, the analysts wrote.”

March 6 – Bloomberg (Jana Randow): “The European Central Bank’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31% bigger than the German economy, after a second tranche of three-year loans. Lending to euro-area banks jumped 310.7 billion euros to 1.13 trillion euros… The balance sheet gained 330.6 billion euros in the week. It is now more than a third bigger than the U.S. Federal Reserve’s $2.9 trillion and eclipses the 2.3 trillion-euro gross domestic product of Germany, the world’s fourth largest economy.”

March 8 – Bloomberg (Matthew Brockett and Jana Randow): “European Central Bank President Mario Draghi signaled he’s done enough to battle the sovereign debt crisis, laying the groundwork for an eventual exit from record-low interest rates and emergency lending measures. Declaring that the environment ‘has improved enormously’ and there are ‘many signs of returning confidence in the euro,’ Draghi turned the spotlight instead on ‘upside risks’ to inflation, which is now forecast to remain above the ECB’s 2% limit this year… ‘The ECB adopted a significantly less dovish tone, dropping anything that could hint at any additional non-standard measure or a further rate cut to come,’ said Holger Schmieding, chief economist at Berenberg Bank in London. ‘Instead, the tone suggests that the ECB expects its eventual next move to be a reversal of some non-standard measures or even a rate hike.’”

March 8 – Bloomberg (Jana Randow): “Juergen Stark, who resigned from the European Central Bank’s executive board last year, said the latest expansion of collateral rules in some euro-area countries to include credit claims has to be seen critically… ‘The balance sheet of the euro system isn’t only gigantic in size but also shocking in quality,’ Stark was quoted as saying… Short-term claims of the ECB and the 17 national central banks that comprise the euro region have increasingly been replaced with long-term ones, making it harder to exit loose crisis-related policy, he said, according to FAZ. Bundesbank President Jens Weidmann said the unprecedented three-year loans are ‘at the limits’ of the central bank’s mandate and warned of ‘substantial risks,’ Der Spiegel magazine reported…”

March 9 – Financial Times (Victor Mallet): “In the years of economic crisis since the collapse of Lehman Brothers in 2008, Spanish leaders have always been able to boast to nervous investors that Spain’s public debt burden – however bad its annual budget deficits – is smaller than Germany’s and well below the European Union average. Economists, business executives and even government officials, however, have started to sound the alarm about the rapid and unsustainable growth of the country’s public debt. The original boast remains officially true, despite scepticism about ‘peripheral’ European economies after the Greek bailouts. The latest statistics from September 2011 show total Spanish public sector debt standing at €706bn…a manageable 66% of… gross domestic product. But the total debt is already much higher than the number calculated according to the EU’s definitions. Moreover, it is growing quickly with each successive annual deficit. This year will see a further €60bn added to the total, or 6% of GDP, and it could be greatly swollen in future by contingent liabilities for everything from bank bailouts to guarantees for lossmaking toll road contracts managed by the private sector.”

March 6 – Bloomberg (Nicholas Dunbar and Elisa Martinuzzi): “Greece’s secret loan from Goldman Sachs Group Inc. was a costly mistake from the start. On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said. Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs. ‘The Goldman Sachs deal is a very sexy story between two sinners,’ Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said…”

March 5 – Bloomberg (Dara Doyle): “Ireland is falling out of love with Europe, and the consequences may be costly. The country is preparing to vote for a fifth time in 11 years on a European Union treaty. Unlike previous referendums, an Irish rejection of the euro region’s latest financial agreement wouldn’t veto the deal for the rest of Europe… ‘Although Ireland remains a pro-euro country, the love affair with Europe has definitely suffered in recent years,’ said Frank Oeland Hansen, a senior economist at Danske Bank…”

March 5 – Bloomberg (Lisa Abramowicz and Kristen Haunss): “European high-yield companies are tapping the U.S. bond market at a record pace as investors funnel unprecedented amounts of cash into dollar-denominated junk-debt funds and the sovereign crisis restricts bank lending in the region. Issuers led by Germany’s Fresenius Medical Care AG have sold $8.8 billion of the debt in dollars this year, following $16.4 billion in all of 2011… The portion of European speculative-grade offerings sold in dollars has soared to 44% this year, up from 31% in 2011 and double the rate in 2010.”

March 9 – Financial Times (Dan McCrum and Nicole Bullock): “The world’s biggest private equity deal is facing rising financial pressure during the next two years with the expiry of contracts that underpinned the takeover of utility TXU. Investors in the $45bn buyout of the company, now known as Energy Future Holdings, fear a sharp drop in revenue as hedges that protected it from a fall in natural gas prices that are used to determine electricity charges in its home state of Texas progressively expire by 2014. Since the deal was signed, the US energy industry has been transformed by the application of new drilling techniques to huge deposits of natural gas locked in shale rock formations from Texas to Pennsylvania.” …EFH was purchased by a private equity consortium led by KKR, Goldman Sachs, and TPG in 2007 for $45bn in debt and equity at the peak of the buyout boom. Since then, Texas gas prices have fallen from a high of $13.69 per million British thermal units in 2008 to below $2.30 earlier this year."

Global Bubble Watch:

March 7 – Wall Street Journal (Jon Hilsenrath): “Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead. Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed's previous efforts to aid the recovery.”

March 5 – Bloomberg (Daniel Kruger and John Detrixhe): “For all the concern that the $10 trillion market for Treasuries is dependent on Federal Reserve purchases to absorb a continually expanding supply of debt, the amount held by investors outside the U.S. has grown even more. Foreigners increased their holdings of U.S. government debt by $1.84 trillion to a record $5 trillion since the Fed began the first round of Treasury purchases in May 2009, taking their stake to 60.5% of the securities not held by the central bank… The Fed added $1.18 trillion during that period, to $1.65 trillion, or 16.8% of the total, from 7.6%.”

March 9 – Bloomberg (Sridhar Natarajan): “Corporate bond sales in the U.S. are soaring this week to the most since May as signs of an improving economy drive the nation’s share of global issuance to the highest this year. Phillips 66… lead at least $50 billion of offerings… The surge comes as European offerings plummet to the least this year, with borrowers waiting for Greece to persuade investors to participate in the biggest sovereign-debt restructuring in history. Sales in the U.S. this week were boosted by $26.9 billion of bonds issued on March 5, the busiest day this year…”

March 7 – Bloomberg (Jody Shenn): “Ginnie Mae securities, the only mortgage bonds with the explicit backing of the U.S. government, are being roiled after avoiding damage last year from President Barack Obama’s push to aid homeowners… Obama announced plans yesterday to cut insurance costs for certain Federal Housing Administration loans to add to efforts intended to stoke refinancing, potentially lowering returns for bond investors. The shift to FHA loans, which mainly are packaged into the $1.1 trillion of securities guaranteed by U.S.-owned Ginnie Mae, underscores the challenges of investing in a market where results depend on policy makers’ attempts to escape the worst housing slump since the Great Depression. ‘It makes it difficult to do your job,’ said David Land, a bond manager at… Advantus Capital Management Inc., which oversees $22 billion. ‘It literally seems like the rules change almost weekly. It almost makes you have your head on a swivel.’”

Currency Watch:

March 7 – Financial Times (Henny Sender and Joe Leahy): “China intends to extend renminbi loans to other Brics nations, in another step towards the internationalisation of its currency. The China Development Bank will sign a memorandum of understanding in New Delhi with its Brazilian, Russian, Indian and South African counterparts on March 29… The initiative aims to boost trade between the five nations and promote use of the renminbi, rather than US dollar, for international trade and cross-border lending.”

The dollar index gained 0.8% this week to 80.04 (down 0.2% y-t-d). On the upside, the Mexican peso increased 0.9%. On the downside, the Brazilian real declined 3.4%, the Swedish krona 1.8%, the Norwegian krone 1.6%, the Australian dollar 1.5%, the British pound 1.0%, the New Zealand dollar 0.9%, the Japanese yen 0.8%, the South African rand 0.6%, the Danish krone 0.6%, the euro 0.6%, the Swiss franc 0.5%, the South Korean won 0.2%, the Taiwanese dollar 0.2%, the Singapore dollar 0.2%, and the Canadian dollar 0.1%.

Commodities Watch:

The CRB index declined 1.1% this week (up 4.0% y-t-d). The Goldman Sachs Commodities Index added 0.4% (up 9.7%). Spot Gold was about unchanged at $1,714 (up 9.6%). Silver declined 0.9% to $34.21 (up 23%). April Crude gained 70 cents to $107.40 (up 8.7%). April Gasoline gained 1.8% (up 25%), while April Natural Gas sank 6.4% (down 22%). May Copper declined 1.1% (up 12%). March Wheat dropped 4.8% (down 2%), and March Corn declined 0.8% (up 1%).

China Watch:

March 5 – Bloomberg: “China pared the nation’s economic growth target to 7.5% from an 8% goal in place since 2005, a signal that leaders are determined to cut reliance on exports and capital spending in favor of consumption. Officials will also aim for inflation of about 4% this year, unchanged from the 2011 goal…”

March 9 – Bloomberg: “China’s home sales declined 25% in the first two months of the year as the government pledged to maintain its housing curbs. The value of homes sold fell to 336.6 billion yuan ($53.4bn) from a year earlier… Housing sales surged 26% in the first two months of 2011.”

March 9 – Bloomberg: “China’s new yuan loans were less than estimated in February and money supply growth was below the government’s target… raising the odds of policy easing to support credit. Local-currency-denominated loans were 710.7 billion yuan ($113bn) last month… That compares with the 750 billion yuan median estimate… and 738 billion yuan in January. M2… expanded 13% in February from a year earlier.”

March 9 – Bloomberg: “China’s passenger-car sales had their worst two-month start in seven years as slowing economic growth and record fuel prices discouraged consumers in the world’s largest vehicle market. Wholesale deliveries of passenger automobiles… declined 4.4% to 2.37 million units in January and February…”

March 7 – Bloomberg: Chinese developers will probably face more credit rating downgrades over the next six months as refinancing risks increase, according to Standard & Poor’s. The nation’s home prices may decline 10% by June from a year earlier… More developers, including the biggest real estate companies, are offering discounts, the credit rating company said. ‘The worst is yet to come for Chinese developers,’ S&P analysts led by Bei Fu said…”

Japan Watch:

March 9 – Bloomberg (Masaki Kondo and Monami Yui): “Japan, the world’s biggest debtor, is losing its trade-surplus advantage, threatening to send some of the world’s lowest bond yields higher. The yen slid toward a nine-month low against the dollar yesterday after Japan posted a 437.3 billion yen ($5.4bn) deficit in its January current account... Decades of current-account surpluses accumulated as household and corporate savings, which domestic banks funneled into government debt that’s grown to double the size of the economy. In the absence of those funds, yields may surge if Japan starts to rely on foreign investors or the central bank to finance budget deficits, Takatoshi Ito, a former senior Ministry of Finance official, said…”

India Watch:

March 9 – Bloomberg (Kartik Goyal): “India’s central bank unexpectedly slashed the amount of deposits lenders need to set aside as reserves to ease a cash squeeze in the banking system that threatens to deepen an economic slowdown. The Reserve Bank of India reduced the cash reserve ratio to 4.75% from 5.5%...”

March 9 – Bloomberg (Tushar Dhara): “India’s merchandise exports rose at the slowest pace in three months as Europe’s debt crisis crimped demand for the nation’s engineering goods and textiles. Merchandise shipments rose 4.3% in February from a year earlier…”

Asia Bubble Watch:

March 6 – Bloomberg (Bei Hu): “Asia-focused hedge funds that were started with the help of a major backer after the 2008 credit crisis are shutting down as a shrinking pool of key investors makes it harder for them to raise capital… New hedge funds that began trading after the collapse of Lehman Brothers…, including those run by refugees from investment banks, were expected to lead a revival for the industry. Instead, managers with more than $5 billion have lured the bulk of allocations, while a more recent crop of large startups are diverting investors from smaller competitors.”

Europe Economy Watch:

March 8 – Bloomberg (Jeff Black and Jana Randow): “Inflation is back on the European Central Bank’s radar, complicating efforts to bolster growth as the sovereign debt crisis pushes the economy toward recession. The ECB will lift its 2012 inflation forecast above the 2% price-stability threshold… limiting its ability to cut interest rates further… ‘Draghi’s message won’t be a particularly pleasant one,’ said Klaus Baader, chief euro-area economist at Societe Generale SA in London. “The ECB will breach its inflation limit for another year and the economic outlook hasn’t brightened significantly. That’s tying their hands on rates for now.’”

March 5 – Bloomberg (Richard Weiss): “Subway drivers in Frankfurt and daycare staff in Mainz went on strike today, starting a week of walkouts by German public-sector workers as the Ver.di labor union attempts to push through wage increases… Strikes will start in the states of Baden-Wuerttemberg and Mecklenburg-West Pomerania tomorrow and cover all 16 German states by March 9… Ver.di, Germany’s second-biggest union, wants 6.5% increases for 2 million public-sector workers and a minimum raise of 200 euros ($264) a month, in contrast to workers in nations from Ireland to Greece that are seeing their pay cut as governments try to reduce debt.”

Imbalanced Global Economy Watch:

March 9 – Bloomberg (Greg Quinn): “Canada’s jobless rate fell for the first time in five months in February even as employment declined… Employment fell by 2,800 after a January increase of 2,300... The unemployment rate fell to 7.4% from 7.6%...”

March 8 – Bloomberg (Michael Heath and Andy Sharp): “Australian employers unexpectedly cut jobs, South Korea’s central bank warned of ‘downside’ risks to growth and Japan reported an increasing reliance on energy imports that threatens to damp its economic rebound. Today’s indicators highlighted headwinds for the Asia- Pacific region’s expansion as policy makers evaluate whether to add to stimulus implemented in recent months. With inflation pressures remaining, South Korean, New Zealand and Indonesian officials kept benchmark interest rates unchanged.”

U.S. Bubble Economy Watch:

March 9 – Bloomberg (Timothy R. Homan): “The trade deficit in the U.S. widened in January to the largest since October 2008 as imports rose to a record high. The gap increased 4.3% to $52.6 billion, more than forecast… Exports of capital goods, as well as cars and automobile parts, climbed to a record.”

March 5 – Bloomberg (Alex Kowalski): “Employers in the U.S. boosted payrolls more than forecast in February, capping the best six-month streak of job growth since 2006 and sending stocks higher. The 227,000 increase followed a revised 284,000 gain in January that was bigger than first estimated…”

Muni Watch:

March 7 – Bloomberg (Darrell Preston): “The near-failure by U.S. states to fund rising retiree health-care costs for millions of government workers threatens to produce budget crises similar to the one that pushed Stockton, California, to take a step toward bankruptcy last week. States haven’t financed almost 96% of the $627.4 billion they were projected to owe for future retiree benefits in 2010, according to Bloomberg… The estimated deficit grew from about 95% in 2009 as governors coped with lower general-fund revenue and rising demand for services following the longest recession since the Great Depression. ‘The whole country is dealing with’ finding a way to finance the projected costs of retiree health care, said Chris Christie… His state owed almost $7,600 per resident for public workers’ post-employment benefits other than pension payments. Alaska, Connecticut and New Jersey had the largest unfunded liabilities, ranked in proportion to population, among the 47 states examined. ‘How do we deal with the cost of health care, especially the cost of health care as we get older?’ Christie, 49, told reporters…”

March 9 – Bloomberg (Darrell Preston and Brian Chappatta): “Illinois debt is rallying the most in a year, signaling increasing demand for the lowest-rated U.S. state as it prepares to issue $500 million of bonds next week while struggling to pay $9.2 billion of overdue bills.”