Saturday, December 6, 2014

Weekly Commentary, February 1, 2013: Late 90s Like

“Dow, S&P 500 Post Best January since the 1990s,” noted a USA Today headline. According to Reuters (Sam Forgione citing Lipper data), “Investors poured $12.71bn into U.S.-based mutual funds and exchange-traded funds in the latest week, concluding the strongest four-week flows into stock funds since 1996…” And from Bloomberg (Sarika Gangar): “Sales of corporate bonds from the U.S. to Europe and Asia are accelerating, marking their busiest January ever following unprecedented issuance in 2012… Berkshire Hathaway… led issuers selling $409.5 billion of bonds this month, up from $226 billion in December and surpassing the $407.2 billion sold in January 2009… Sales last year soared 20.5% to $3.96 trillion.” Excitement got the better of a CNBC anchor as he exclaimed, “The whole world is watching to see if the Dow can hit 14,000!”

Today’s newfound optimism and references to the nineties do bring back memories. The S&P 500 jumped 316% during that decade (“total return” with reinvested dividends 423%). Fueling the boom, total system Credit (non-financial and financial) inflated 96% to $21.25 TN. This was quite an impressive expansion for a Credit system that began the decade with a highly impaired banking system. Still, the Credit aggregates tell only part of the story.

Having delved deeply into macro Credit analysis beginning back in 1990, I was increasingly astounded by developments later in the decade. By the end of 1999, GSE assets had expanded 280% in ten years to $1.72 TN. Agency mortgage-backed securities (MBS) increased 160% to $2.29 TN; asset-backed securities (ABS) were up more than five-fold to $1.31 TN. Securities Broker/Dealer assets increased 320% to $1.0 TN. Fed Fund and Repurchase Agreements rose 160% to $925bn, and Wall Street “Funding Corps” jumped 390% to $1.07 TN. Money Fund Assets increased 270% to $1.58 TN. For comparison, U.S. Private Depository Institutions (chiefly banks) saw 40% growth during the decade to $6.85 TN. To be sure, analysts focusing on traditional indicators such as bank reserves, bank loan growth and the monetary aggregates were running blind.

The world of finance had been transformed right before my weary eyes. The traditional bank loan-centric Credit system was supplanted by Fannie, Freddie, the FHLBs, MBS, ABS, “repos,” SPVs (special-purpose vehicles), “funding corps,” derivatives, hedge funds and “Wall Street finance,” more generally.

There was no doubt in my mind that these developments were momentous. It was out with “fractional reserve banking” and the “deposit multiplier” - and in with the “infinite multiplier” and the specter of an unlimited supply of finance. Out with the staid bank loan and in with the dynamic marketable debt security to be financed in the marketplace and leveraged for speculative profits. No longer would our central bank have to prod banking lending with reduced funding costs, when a brief statement achieved the power to immediately incite risk-taking and leveraging throughout the securities markets. Unlike traditional bank finance, this new marketable-based Credit could be easily manipulated. For the investment banker, market operator and central banker, the new finance was just too seductive.

With New Age Credit now available in limitless quantities, no longer would the system have the inconvenience of supply and demand determining the price of borrowing/finance. Now, it could largely be left to the judgment of a small cadre of (largely academic) central bankers – or, more simply, just leave it to their leader. Contemporary risk intermediation methods and securities financing outside of traditional bank lending and deposit channels had completely changed finance – and with it monetary policy doctrine.

And, almost to the individual, everyone back in the late-90s told me I was absolutely wrong. Conventional thinking held steadfastly to the view that “only banks create money and Credit.” I would explain how non-bank Credit expansion was no longer restrained by traditional bank capital and reserve requirements, and I was informed in no uncertain terms that my theory was flawed.

Yet it wasn’t really a “theory” as much as it was reality. Everyone was so enamored with “New Paradigm” and “New Era” thinking, it was easy to disparage my analysis. The markets were really strong – and the “naysayers” had become a joke. Candidly, I still have a bit of a chip on my shoulder from the whole experience. Some years later (2007), Pimco coined the phrase “shadow banking” and the analysis soon became obvious to everyone. The mortgage finance Bubble was transformed to obvious. It was all obvious, in hindsight.

Each passing week, the current environment seems more Late-90s-Like. Indeed, contemporary finance has gone through another momentous transformation, yet seemingly nobody is on top of the analysis. Perhaps no one wants to be. And my work has completely diverged from conventional thinking. I’m more comfortable in this lonely position these days - and by now well-versed in the idiosyncratic nature of conventional thinking/analysis.

A rather long book could be written on this subject, but I’ll do my best to muster a brief summary. The key to the new finance of the nineties was that it was predominantly market-based. The GSEs, securitizations, “repos,” and “Wall Street finance” were creating unlimited amounts of finance and directing it mostly to the assets markets (stocks, bonds, real estate, etc.). Accordingly, asset inflation and asset Bubbles were the prevailing inflationary manifestation throughout that particular Credit boom.

The technology and Internet stock mania burst in early-2000. The panicked Fed went into post-Bubble reflation/reliquefication mode. Unemployment rose to 6% in late-2002, and a new Fed governor spoke of the need for “helicopter money” and the “government printing press” to fight the scourge of deflation.

From my analytical framework, tech stocks were never THE “Bubble,” but rather the most conspicuous consequence of an unfolding Bubble in Credit. In 2002, I began my “mortgage finance Bubble” warnings. To say I was alone in talking “Bubble” back in 2002 was an understatement. Conventional thinking was fixated on deflation and economic stagnation. “Muddle through” was viewed as the best case in a “post-Bubble” deflationary environment. All risks were seen on the downside.

My analytical framework remained focused on this new “Wall Street finance” and its unique inflationary potential. Mortgage Credit and house prices had already commenced an inflationary cycle. From this analytical perspective, aggressive (“activist”) central bank intervention/manipulation would likely rejuvenate Wall Street finance and push mortgage finance excess to dangerous Bubble extremes. Indeed, if the Federal Reserve was to orchestrate a systemic bailout for this asset-based Credit apparatus, one could expect the GSEs, securitizations, derivatives, hedge funds and “Wall Street finance” to bounce back fully emboldened and more powerful than ever. Such is the nature of Bubbles.

Mortgage Credit doubled in just over six years. Highly relevant to current analysis, this historic Bubble prolonged an epic economic restructuring. The deindustrialization of the U.S. economy gathered further momentum, while historic asset inflation and housing equity extraction helped spur only greater consumption and demand for services. Persistently large Current Account Deficits became enormous. Our “Bubble dollars” inundated the world.

When the mortgage finance Bubble burst in 2008, there was seemingly no way to avoid a major financial and economic adjustment period – in the U.S. and globally. With U.S. household Net Worth trashed, the housing “ATM” shuttered, private-sector Credit contracting and huge job losses on the horizon, major swathes of the U.S. Bubble Economy were immediately made uneconomic.

Economic depressions have made regular appearances throughout history. Recessions are “cyclical” mechanisms that work to mitigate the buildup of system of excesses (spending and inventories, etc.) that accumulate during a boom period. Depressions, on the other hand, are more “secular.” Traditionally, depressions are the inevitable consequence of prolonged Credit booms and attendant deep economic structural maladjustment. Depressions are about Credit failure and resulting major economic adjustment and rebalancing (today, think Greece and Spain).

I believed at the time the U.S. economy faced a depression-like adjustment following the 2008 bursting of the mortgage finance Bubble. With Fannie and Freddie bust and “private-label” securitizations and Wall Street obligations discredited, the heart of “nineties” New Age finance was pretty much dead. It was clear that mortgage Credit would contract – and that private-sector Credit growth would be minimal at best. Most importantly, system Credit expansion would be insufficient to sustain income and spending levels that had inflated tremendously during the protracted boom period. Falling incomes would be big trouble for the maladjusted economic structure and the U.S. Credit system overall. There were indications of how this dynamic would unfold during 2009.

In April 2009, I began warning of the risks of fueling a “global government finance Bubble.” I didn’t fully appreciate what was unfolding back in ’09. But it was clear that the Federal Reserve, Treasury and global policymakers were prepared to do just about anything. Similar to mortgage finance in 2002, government finance was already demonstrating powerful Bubble characteristics by 2008. The mortgage finance Bubble had collapsed, yet a potentially even greater Credit Bubble was gathering momentum. After all, government finance enjoyed greater “moneyness” than ever – and over-issuance began in earnest. Massive federal deficits coupled with Federal Reserve monetization held the possibility for the biggest Bubble of them all. It’s already historic.

In somewhat of a replay of the nineties, our Credit system has again experienced an historic transformation. The nineties version was about unfettered market-based Credit. Today, it’s unfettered government-based finance. Both are about risk obfuscations, misperceptions and mis-pricing. Few appreciated how this finance distorted asset markets and the structure of the real economy from the mid-nineties through 2008. Few appreciate the nature of today’s Credit Bubble. Seemingly no one recognizes how profoundly the government finance Bubble is inflating system incomes.

For perspective, let’s start with some expenditure data from the U.S. budget. We know that the federal government ran unprecedented Trillion dollar plus deficits for four straight years, though I’d argue that the aggregate deficit doesn’t do justice to the impact of surging federal spending levels. For enlightenment, I’ll highlight spending growth by major federal agency. In just four years (2007-2011), Social Security expenditures jumped 24% to $731bn. National Defense was up 28% to $706bn. Income Security surged 63% to $597bn. Medicare inflated 29% to $486bn. Health Services was up 40% to $373bn. Veterans Benefits & Services surged 75% to $127bn. Transportation was up 28% to $93bn.

This unprecedented inflation in federal government spending has made all the difference in the world. Importantly, it has sustained the ongoing system-wide inflation of income levels. And record incomes have ensured record expenditures throughout the general economy. And this spending has been fundamental to sustaining what I believe is a deeply maladjusted economic structure. Record incomes have supported record corporate profits and, basically, record stock and bond prices. And record stock and bond prices have supported record corporate debt issuance. Meanwhile, record incomes, spending, securities prices, and bond issuance have bolstered the perception that the U.S. economy is fundamentally sound and federal debt levels supportable. In short, “government finance Bubble” Credit creation has been “validating” tens of Trillions of outstanding U.S. debt.

There is another important facet to this “government finance Bubble” thesis beyond inflating government expenditures and system income growth. Bubbles are about the self-reinforcing over-issuance of mis-priced finance. Recall the notion of “crowding out”? If the government borrowed too much, this would supposedly reduce the availability (increase the cost!) of Credit for private-sector borrowers. Well, in an era of unlimited finance “crowding out” no longer applies.

Indeed, despite the federal government’s unprecedented borrowing binge, 2011 federal Total Net Interest was actually down 3% from the 2007 level to $230bn. And this doesn’t even reflect the remittance of interest income from the Federal Reserve back to the Treasury ($90bn last year!). It is worth noting that debt service in the past would make up a large amount of federal deficit spending. In 1992, for example, Total Net Interest of $199bn accounted for a majority of the total deficit.

This is an age where our central bank sets interest-rates at artificially low levels, while monetizing Trillions of federal (and mortgage) debt. It is worth noting that today relatively little flows from the Treasury to the holders of federal debt. In the past, these payments were a large part of deficit spending and were essentially “payment-in-kind” debt – with a muted overall income/spending/economic impact. Conversely, the current monetary policy regime ensures that the vast majority of government expenditures actually feed directly through to incomes and spending throughout the economy. The bond holder gets cheated with low coupons, but makes it up with inflated bond prices courtesy of Fed and global central bank purchases. Savers, well, they just get cheated.

This is essentially a scheme that monetizes system-wide income inflation. Previous CBBs have attempted to explain how the “government finance Bubble” has become much more systemic while at the same time much less obvious. Above I noted how enormous government-supported income inflation has been instrumental in sustaining the maladjusted U.S. Bubble economy. This, in turn, has sustained huge ongoing U.S. Current Account Deficits.

Unrelenting trade and “capital” account deficits have ensured the ongoing injection of dollar financial claims into inflated global financial systems, markets and economies. Unending dollar flows have, in particular, bolstered “developing” Credit systems, economies and Bubbles. China and “developing” central banks have, then, continued the recycling of Trillions of surplus dollar balances directly back into U.S. Treasury and agency debt markets, in the process helping to monetize U.S. income growth, inflate securities markets and sustain the U.S. Bubble Economy. All along the way, perilous global imbalances know only one direction: bigger. And the greater the imbalances, the lower global central bankers peg rates and the more they resort to unfathomable “quantitative easing”/“money printing.”

I’m OK if every analyst in the world disagrees. It doesn’t change the reality that we’ve experienced another historic transformation in U.S. and global finance - and we are these days witnessing the consequence: history’s greatest synchronized Credit, market and economic Bubbles.

For the Week:

The S&P500 gained 0.7% (up 6.1% y-t-d), and the Dow increased 0.8% (up 6.9%). The S&P 400 Mid-Caps added 0.5% (up 8.0%), and the small cap Russell 2000 gained 0.7% (up 7.3%). The Morgan Stanley Cyclicals slipped 0.3% (up 7.3%), and the Transports dipped 0.2% (up 10.4%). The Morgan Stanley Consumer index jumped 1.3% (up 7.7%), and the Utilities gained 0.8% (up 4.5%). The Banks rose 1.1% (up 6.7%), and the Broker/Dealers surged 2.8% (up 12.4%). The Nasdaq100 was 1.0% higher (up 3.9%), while the Morgan Stanley High Tech index was down 0.6% (up 6.2%). The Semiconductors gained 1.2% (up 9.5%). The InteractiveWeek Internet index declined 1.0% (up 9.1%). The Biotechs added 0.1% (up 8.7%). With bullion up $9, the HUI gold index recovered 0.2% (down 10.0%).

One-month Treasury bill rates ended the week at 2 bps and 3-month rates closed at 7 bps. Two-year government yields were down a basis point to 0.26%. Five-year T-note yields ended the week up 4 bps to 0.89%. Ten-year yields rose 7 bps to 2.02%. Long bond yields jumped 9 bps to 3.23%. Benchmark Fannie MBS yields rose 11 bps to 2.60%. The spread between benchmark MBS and 10-year Treasury yields widened 4 to 58 bps. The implied yield on December 2014 eurodollar futures was unchanged at 0.65%. The two-year dollar swap spread was unchanged at 16 bps, while the 10-year swap spread increased 2 to 8.5 bps. Corporate bond spreads widened a little. An index of investment grade bond risk increased one to 86 bps. An index of junk bond risk gained 4 to 434 bps.

Debt issuance remained strong. Investment grade issuers included Berkshire Hathaway $3.6bn, General Mills $1.0bn, Key Bank $1.0bn, FMR $700 million, Mohawk Industries $600 million, Carnival Cruise $500 million, Air Products & Chemicals $400 million, Firstmerit $250 million and Yale $130 million.

Junk bond funds saw inflows slow to $92 million (from Lipper). Junk issuers included Sibine Pass $1.5bn, HD Supply $1.27bn, Lennar $800 million, First Data $785 million, Atlas Pipeline $650 million, Air Lease Corp $400 million, D.R. Horton $700 million, H&E Equipment Services $630 million, Antero Resources $525 million, Ashton Woods $300 million, Talos Production $300 million, Unifrax $205 million, Premium Holdings $200 million, Beazer Homes $200 million, Weekley Homes $200 million and Union 16 Leasing $150 million.

I saw no convertible debt issued.

Another long list of international issuers included Gazprom $1.7bn, MCE Finance $1.0bn, Akbank $1.0bn, Reliance Industries $800 million, Emirates Airlines $750 million, Turkiye Halk Bankasi $750 million, Global A&T Electronics $625 million, NXP $500 million, Hana Bank $500 million, ESAL GMBH $500 million, Ontario $500 million, Orion Engineered $425 million Cementos Pacasmayo $300 million, NCL $300 million, GCC $260 million and Nord Anglia Education $150 million.

Spain's 10-year yields this week increased 3 bps to 5.18% (down 2bps y-t-d). Italian 10-yr yields jumped 20 bps to 4.32% (down 16bps). German bund yields rose 4 bps to 1.67% (up 36bps), and French yields increased 3 bps to 2.24% (up 27bps). The French to German 10-year bond spread narrowed one to 57 bps. Ten-year Portuguese yields rose 7 bps to 6.06% (down 70bps). The new Greek 10-year note yield jumped 37 bps to 10.47%. U.K. 10-year gilt yields gained 4 bps to 2.09% (up 28bps).

The German DAX equities index slipped 0.3% for the week (up 2.9% y-t-d). Spain's IBEX 35 equities index sank 5.7% (up 0.8%). Italy's FTSE MIB fell 2.3% (up 6.4%). Japanese 10-year "JGB" yields rose 4 bps to 0.76% (down 2 bps). Japan's volatile Nikkei jumped 2.4% (up 7.7%). Emerging markets were mixed to higher. Brazil's Bovespa equities index declined 1.3% (down 1.0%), while Mexico's Bolsa added 0.4% (up 4.7%). South Korea's Kospi index rallied 0.6% (down 2.0%). India’s Sensex equities index declined 1.6% (up 1.8%). China’s Shanghai Exchange surged 5.6% (up 6.6%).

Freddie Mac 30-year fixed mortgage rates jumped 9 bps to a 19-wk high 3.53% (down 34bps y-o-y). Fifteen-year fixed rates rose 10 bps to 2.81% (down 33bps). One-year ARM rates were up 2 bps to 2.59% (down 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 12 bps to 4.15% (down 21bps).

Federal Reserve Credit jumped $13.4bn to a record $2.989 TN. Fed Credit has increased $203bn in 17 weeks. Over the past year, Fed Credit expanded $83.3bn, or 2.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $726bn y-o-y, or 7.1%, to $10.938 TN. Over two years, reserves were $1.667 TN higher, for 18% growth.

M2 (narrow) "money" supply dropped $55.0bn to $10.404 TN. "Narrow money" has expanded 6.7% ($655bn) over the past year. For the week, Currency increased $2.5bn. Demand and Checkable Deposits gained $12.5bn, while Savings Deposits sank $58.9bn. Small Denominated Deposits declined $1.8bn. Retail Money Funds fell $9.3bn.

Money market fund assets were little changed at $2.695 TN. Money Fund assets have expanded $38bn y-o-y, or 1.4%.

Total Commercial Paper outstanding was little changed at $1.125 TN CP was up a notable $161bn in 12 weeks and $153bn, or 15.7%, over the past year.

Currency Watch:

January 30 – Bloomberg (Neal Armstrong and David Goodman): “The world’s biggest currency traders are reporting a jump in volumes in 2013 as a slide in the yen, pound and Swiss franc increase anticipation of future price swings to a five-month high. Barclays Plc, the third-largest dealer based on Euromoney Institutional Investor Plc data, said this month that volumes for the yen versus the euro climbed to a daily record and trading across all currencies has risen to the most in a year.”

The U.S. dollar index declined 0.8% to 79.13 (down 0.8% y-t-d). For the week on the upside, the Swedish krona increased 2.4%, the Brazilian real 2.1%, the Swiss franc 2.0%, the Danish krone 1.3%, the euro 1.3%, the Norwegian krone 1.2%, the South African rand 1.2%, the Canadian dollar 0.9%, the New Zealand dollar 0.9% and the Mexican peso 0.8%. For the week on the downside, the South Korean won declined 2.1%, the Japanese yen 2.0%, the Taiwanese dollar 1.5%, the British pound 0.7%, the Singapore dollar 0.5% and the Australian dollar 0.2%.

Commodities Watch:

The CRB index gained 1.9% this week (up 3.4% y-t-d). The Goldman Sachs Commodities Index jumped 2.5% (up 5.0%). Spot Gold recovered 0.5% to $1,667 (down 0.5%). Silver rallied 2.4% to $31.96 (up 5.7%). March Crude gained another $1.89 to $97.77 (up 6.5%). March Gasoline surged 5.7% (up 11%), while February Natural Gas sank 4.7% (down 2%). March Copper jumped 3.6% (up 3.6%). March Wheat declined 1.5% (down 1.7%), while March Corn gained 2.1% (up 5.4%).

U.S. Bubble Economy Watch:

January 31 – Bloomberg (Michael B. Marois): “California is on track to collect $5 billion more in tax revenue this month than estimated in Governor Jerry Brown’s budget, and the state’s fiscal analyst’s office said it can’t say why, yet.”

January 29 – Bloomberg (Shobhana Chandra): “Home prices in 20 U.S. cities rose in November from a year earlier by the most in more than six years, indicating the U.S. housing rebound is gaining ground. The S&P/Case-Shiller index of property values increased 5.5% from November 2011, the biggest year-over-year gain since August 2006…”

January 29 - FICO : “Research by FICO Labs into the growing student lending crisis in the U.S. has found that, as a group, individuals taking out student loans today pose a significantly greater risk of default than those who took out student loans just a few years ago. The situation is compounded by significant growth in the amount of debt that new graduates are carrying. The delinquency rate today on student loans that were originated from 2005-2007 is 12.4%. The comparable figure for student loans that were originated from 2010-2012 is 15.1%, representing an increase in the delinquency rate by nearly 22%. While the delinquency rate is climbing, the average amount of student loan debt is increasing even faster. In 2005, the average U.S. student loan debt was $17,233. By 2012, it had ballooned to more than $27,253 – an increase of 58% in seven years.”

January 31 – Bloomberg (John Detrixhe): “Even after the worst financial crisis since the Great Depression, 10% unemployment and the Federal Reserve’s flooding the world with an extra $3 trillion, the dollar is as strong now as five years ago. The U.S. Trade Weighted Major Currency Index… has risen 1.2% since January 2008. The dollar’s share of global foreign-exchange reserves stands at 61.8%, up from 60.5% in mid-2011… Foreign holdings of Treasuries have climbed 81% to $5.6 trillion since the end of 2008, and non-U.S. investors now own 49.4% of the securities, up from 43% six years ago.”

Muni Watch:

February 1 – Bloomberg (Michelle Kaske): “The municipal-bond market is staging its best performance in a year as rising demand for tax-free income and an upgrade of California’s debt outweigh the busiest borrowing wave since 2010. Localities borrowed about $24 billion through Jan. 30, up 52% from a year earlier and the most January offerings since 2010… Still, the $3.7 trillion market earned about 0.7% through Jan. 30, compared with a loss of 1.1% for Treasuries… The advantage to munis was the biggest since January 2012.”

Global Bubble Watch:

January 31 – Bloomberg (Joshua Zumbrun and Jeff Kearns): “Federal Reserve Chairman Ben S. Bernanke signaled he isn’t close to easing up on $85 billion in monthly bond purchases to spur a stalled economy and bring down 7.8% unemployment. The Federal Open Market Committee said… that growth, while slowed by ‘transitory factors,’ faces ‘downside risks’ even after strains in global financial markets have eased. The expansion will pick up and unemployment will fall in response to ‘appropriate policy accommodation,’ Fed officials said… ‘Everything in this statement suggests that they will continue to buy $85 billion per month and that we still have a ways to go before they’re satisfied that the labor market is where they want it to be,’ said Ward McCarthy, chief financial economist at Jefferies… and a former Richmond Fed economist.”

February 1 – Bloomberg (Charles Stein): “Individual investors rushed into stocks and bonds in January, setting the stage for the biggest month on record for deposits into U.S. mutual funds. Long-term funds, which exclude money-market vehicles, attracted $64.8 billion in the first three weeks of the month, according to the Washington-based Investment Company Institute. The previous record was $52.6 billion for all of May 2009, according to the ICI, whose data goes back to 1984.”

January 28 – Bloomberg (Alastair Marsh): “The lowest volatility for stocks, interest rates and commodities since 2007 is cutting potential returns on structured notes such as reverse convertibles and favoring securities in which capital is protected. The Chicago Board Options Exchange Volatility Index, known as the VIX, touched a 5 1/2-year low of 12.43 on Jan. 22…”

January 31 – Bloomberg (Karin Matussek): “The European Central Bank’s pledge to buy unlimited quantities of government bonds if necessary to save the euro is economically dangerous and may come under scrutiny at the nation’s top court, a German government adviser said. Germany’s Federal Constitutional Court backed a sensible approach to tackling the euro-area debt crisis in a ruling last year on the European Stability Mechanism, Lars Feld, a member of the panel of economic advisers to Chancellor Angela Merkel, said… The ECB’s bond-buying pledge comes close to financing governments, which the court called unlawful in its judgment, he said. ‘Central banks need to be able to buy bonds if there are short-term malfunctions of the markets… But buying bonds without differentiation and without limits would be very problematic.”

January 31 – Bloomberg (Sarika Gangar): “Sales of corporate bonds from the U.S. to Europe and Asia are accelerating, marking their busiest January ever following unprecedented issuance in 2012… Berkshire Hathaway… led issuers selling $409.5 billion of bonds this month, up from $226 billion in December and surpassing the $407.2 billion sold in January 2009… Sales last year soared 20.5% to $3.96 trillion.”

January 30 – Bloomberg (Emma Charlton and David Goodman): “Italian bonds due in more than 10 years are handing investors the biggest returns as a European Central Bank-inspired rally in two- and three-year notes pushes yield-chasing buyers toward longer-maturity debt. Italian and Spanish 15-year rates dropped to the lowest levels in more than two years this month as investors sought higher returns on debt that wouldn’t be eligible under the ECB’s offer to buy bonds.”

January 31 – Bloomberg (Patricia Kuo): “European junk-bond sales are off to the busiest start on record as companies owned by private-equity firms such as Permira Advisers LLP and Doughty Hanson & Co. take advantage of plummeting yields to repay loans. The region’s neediest borrowers have issued $17 billion of speculative-grade bonds this month… That’s 38% more than the previous high of $12.3 billion in January 2011."

February 1 – Bloomberg (Tanya Angerer and Rachel Evans): “Dollar-denominated bond sales from Asia surged to a record in January as companies sought to plug a gap in loan funding. Issuance from the region, excluding Japan, rose to $23.4 billion, 39% more than the previous all-time monthly high of $16.8 billion in September… The monthly average for such offerings has been $3.5 billion since the data began in 1999.”

January 30 – Bloomberg (Sherine El Madany and Claudia Maedler): “Egypt’s benchmark government bond yield jumped the most since President Mohamed Mursi was elected in June after the nation’s defense chief warned that political unrest could bring about the ‘collapse’ of the state. The Arab nation’s benchmark 5.75% dollar bonds due in April 2020 surged 35 bps… to 6.25%...”

Global Credit Watch:

January 29 – Bloomberg (Lisa Abramowicz): “Junk-bond yields have fallen so far that the world’s biggest debt investors are turning to borrowed money to juice returns, a practice that magnified losses during the worst financial crisis since the Great Depression. Bill Gross’s Pacific Investment Management Co. said it plans to sell as much as $3.3 billion of shares for its Pimco Dynamic Credit Income Fund, poised to become the largest taxable income closed-end fund. DoubleLine Capital LP is starting its Income Solutions Fund that may invest an unlimited amount of its assets in speculative-grade debt… Leverage is staging a comeback for investors that oversee more than $2 trillion as speculative-grade yields reach record lows daily with the Federal Reserve holding benchmark interest rates at about zero percent for a fifth year.”

January 31 – Bloomberg (Beth Jinks and Jeffrey McCracken): “While U.S. icons from Hostess Brands Inc. to Eastman Kodak Co. succumb to bankruptcy, credit markets awash with cash are allowing many of the riskiest companies to stay afloat, pushing off restructurings and raising the stakes for investors pursuing higher returns. Junk-bond sales soared to a record last year and speculative-grade borrowers raised the most in loans since the 2007 peak…”

Brian Chappatta and Michelle Kaske Black): “Illinois postponed a $500 million offer of general-obligation bonds planned for today, citing unfavorable market conditions after Standard & Poor’s cut its credit rating last week and threatened to drop the grade again. Illinois still plans to sell the securities, though it has ‘no set date at this point,’ said John Sinsheimer, the state’s director of capital markets… The borrowing would fund school construction and transportation improvements.”

February 1 – Bloomberg (Maud van Gaal and Martijn van der Starre): “The Netherlands took control of SNS Reaal NV after real estate losses brought the fourth-largest Dutch lender to the brink of collapse, the country’s second banking nationalization since 2008. The move, aimed ‘at stabilizing the SNS Reaal group,’ will cost taxpayers 3.7 billion euros ($5bn), the Dutch Finance Ministry said…”

China Bubble Watch:

January 28 – Bloomberg: “Chinese companies are spending more than ever to service debt after their borrowing almost tripled over five years, prompting strategists to warn of rising default risk and a threat to economic growth. Total short- and long-term borrowing by 3,895 publicly traded non-financial companies rose to almost $1.7 trillion in their latest filings, from $604 billion at the end of 2007… Financing costs, including interest, on all forms of debt climbed to the highest level as a percentage of gross domestic product last year, according to Sanford C. Bernstein & Co… The average 10-year yield for top-rated company bonds is near a 13-month high at 5.27%, compared with the 2.6% yield in a Bank of America Merrill Lynch global corporate index. ‘There’s just a lot more debt in China today than there was really ever in the past, relative to nominal GDP,’ said Mike Werner… analyst at Bernstein. ‘More and more of the country’s resources have to be put to just financing outstanding debt, and that itself is a headwind for economic growth.’”

February 1 – Bloomberg: “China last year had the biggest deficit in its financial and capital account since records began in 1982 as the domestic and global economies slowed, spurring outflows of funds. The $117.3 billion annual gap was the first since 1998 when investors deserted China during the Asian financial crisis and reversed a $221.1 billion surplus in 2011… The current-account excess rose to $213.8 billion in 2012 from $201.7 billion the previous year.”

February 1 – Bloomberg: “China’s new home prices rose 1% in January, the biggest gain in two years, as developers turned optimistic because the government did not impose additional measures to curb the property market last month. Prices climbed for an eighth month in January to 9,812 yuan ($1,577) per square meter (10.76 square feet) from December, SouFun Holdings Ltd., the country’s biggest real estate website owner, said… Developers have supplied more high-end properties to the market since the Ministry of Housing and Urban-Rural Development said in December that it would support demand from residents seeking bigger homes this year, SouFun said.”

January 30 – Bloomberg (Weiyi Lim): “Chinese stocks rose, led by property companies and brokerages, as the Shanghai Composite Index extended its bull-market rally. Gemdale Corp. led a gauge of property developers to a 21- month high as Fitch Ratings said Chinese homebuilding volumes will rise this year.”

January 29 – Bloomberg: “Beijing told its 20 million residents to stay indoors today after a U.S. Embassy pollution monitor showed that air quality reached hazardous levels for the 18th day this month. The concentration of PM2.5, the fine air particulates that pose the greatest health risk, was 476 at 2 p.m., more than 19 times World Health Organization recommendations for day-long exposure and 50% higher than the embassy’s ‘hazardous’ cutoff of 301. Anything above 500 is branded ‘beyond index.’”

January 30 – Financial Times (Jamil Anderlini): “Flights have been cancelled, traffic disrupted and hospital wards filled with patients, but one part of the Chinese economy is benefiting from Beijing’s toxic air pollution. Air purifier and face mask vendors have sold out of many of their most popular products as the Chinese capital was smothered this week in a cloud of hazardous, choking smot for the fourth time in less than a month. Beijing-based executives and sales agents for these companies estimate sales of air purifying machines have more than tripled over the past month… An executive at Yuan Da, a Chinese company that makes the machines that purify the air for top Chinese Communist party officials, said they sold 3.5m units online in January, compared with sales of about 1m in October.”

Japan Bubble Watch:

January 29 – Bloomberg (Yumi Ikeda and Mariko Ishikawa): “Japan’s government plans to increase bond sales to a record 156.6 trillion yen ($1.7 trillion) in the fiscal year starting April 1. The amount being offered to investors such as banks and life insurers is 6.9 trillion yen more than the 149.7 trillion yen in the initial plan for fiscal 2012… The government expects to expand the sizes of monthly auctions for two-year debt, boost the frequency of thirty-year bond sales and increase the amount raised through five- and ten- year auctions, according to the schedule.”

February 1 – Bloomberg (Mayumi Otsuma and Kyoko Shimodoi): “Japan will spend more money than ever on servicing its debt next fiscal year even as interest rates hover near a nine-year low, limiting Prime Minister Shinzo Abe’s ability to support the economy with fiscal stimulus. Interest payments on outstanding bonds and refinancing costs totaling 22.2 trillion yen ($241bn) will make up 24% of the fiscal 2013 budget…”

February 1 – Bloomberg (Christopher Anstey, Toru Fujioka and Mayumi Otsuma): “Prime Minister Shinzo Abe shortened his list of candidates for Bank of Japan governor as he seeks to end decades of reluctance at the central bank to accept responsibility for the nation’s inflation rate… The government should unveil the name, and replacements for deputies whose terms are up in coming weeks, by the end of February, the ruling party’s upper-house legislative affairs chief said last month.”

Latin America Watch:

February 1 – Bloomberg (Boris Korby): “Brazilian companies led by Banco do Brasil SA sold the most junk debt since May 2011 last month as unprecedented global demand for high-risk securities enabled the neediest borrowers to chop their financing costs… Junk- bond issuance accounted for 81% of Brazil’s corporate debt sales, versus 34% globally and 18% in the country last year…”

Central Bank Watch:

January 31 – Bloomberg (Tracy Withers): “New Zealand’s central bank extended a period of record-low borrowing costs and signaled concern about rising house prices, sending the local dollar higher. ‘House price inflation has increased and we are watching this and household credit growth closely,’ Reserve Bank Governor Graeme Wheeler said… after keeping the official cash rate at 2.5%. ‘The bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.”

Federal Reserve Watch:

January 29 – Bloomberg (Joshua Zumbrun, Jeff Kearns and Catarina Saraiva): “Federal Reserve Chairman Ben S. Bernanke’s latest round of bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to median estimates in a Bloomberg survey… Bernanke will push on with purchases of $40 billion a month of mortgage bonds and $45 billion a month of Treasuries…, even as some Fed officials warn his unprecedented balance-sheet expansion will impair efforts to tighten policy when necessary.”

January 30 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Kansas City President Esther George dissented today in her first vote on the central bank’s policy committee because she was concerned that record stimulus may fuel the risk of financial instability and a surge in inflation. George ‘was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations,’ the Federal Open Market Committee statement said. Since she became the leader of the Kansas City Fed in October 2011, George’s views have echoed those of her predecessor, Thomas Hoenig, who dissented from policy actions in 2010 and called for raising the benchmark interest rate from near zero. No first-time voter has dissented in recent decades, said Carnegie Mellon University professor Allan Meltzer, an economist and author of a two-volume history of the Fed from 1913 to 1986. It’s ‘unusual and probably unprecedented to dissent on first vote,’ Meltzer said. ‘President George recognizes that the policy is wrong’ and that Fed stimulus isn’t bolstering growth, ‘unlike the throng cheering the policy on,’ he said.”

February 1 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said he will urge reducing the pace of central bank asset purchases by the middle of the year if U.S. growth picks up as he expects. ‘We should think about tapering or adjusting the program,’ Bullard said… ‘If you get some good data for a couple of months, maybe you’d say, ‘Okay, we go back to $75 billion per month instead of $85 billion or something like that.’”

Europe Watch:

February 1 – Bloomberg (Marcus Bensasson): “The euro-area jobless rate remained unchanged in December, adding to signs the currency bloc’s economy may be starting to emerge from a recession. Unemployment in the 17-nation currency bloc held at 11.7%...”

January 29 – Bloomberg (Anchalee Worrachate and Angeline Benoit): “European Central Bank President Mario Draghi’s success in driving down borrowing costs for the most indebted euro nations risks lowering their incentives to tackle budget deficits, revive growth and reduce unemployment. ‘Having taken away the breakup risk for Europe, what they’ve got now is a crisis that is chronic rather than acute,’ said Stuart Thomson… at Ignis Asset Management in Glasgow. ‘Europe is doing exactly what Japan has done. When there is a crisis, there will be a response, improvement and then complacency. Europe is in a complacency period now.’”

January 28 – Dow Jones: “Lending to the private sector fell further in most euro-zone countries in December… Loans to Spanish households and companies dropped sharply, by 2.8%, from the previous month, while credit to such entities in Italy fell by 0.7%, the ECB said. There were declines of 0.5% in Greece and 0.6% in Portugal, and even Germany saw a drop of 0.3%. However, there were bright spots in France, where lending rose 0.4% and… in Cyprus, where it rose 1.8%. The ECB data showed little sign of systemic pressures from deposit flight, with private deposits in Greece surging 4.1% from the previous month to the highest level since April last year. Bank deposits also rose in Italy, by 3.7% on the month, and Spain.”

January 30 – Bloomberg (Scott Rose and Paul Tugwell): “When the leader of the Orthodox Church in Cyprus requested financial assistance for the ailing country last week, he turned east, not west. Archbishop Chrysostomos II, acting ‘at the government’s disposal,’ said on Jan. 24 he asked his counterpart in Moscow to try to persuade President Vladimir Putin to grant another emergency loan, adding to the 2.5 billion euros ($3.4bn) Cyprus got from Russia 13 months ago. Fifteen years after its own default, Russia is reluctantly being pulled into efforts to keep the 17-nation euro area intact because of financial ties with Cyprus that Germany claims involve money laundering. Government support of Cyprus’s banks may push its total aid program to more than 17 billion euros, almost equaling the island’s 18 billion-euro gross domestic product, according to Fitch Ratings.”

Germany Watch:

January 30 – Bloomberg (Jeff Black): “Bundesbank President Jens Weidmann said Europe’s current framework for bailing out distressed nations will eventually weaken even the single currency’s strongest members unless it is changed. ‘If things stay the way they are, the consequences of unsound policies will be too easily passed on to others,’ Weidmann said… ‘Sooner or later the economically solid countries will be weakened. Liability and control have to be brought into balance.’ Germany, Europe’s largest economy, has pledged more than 300 billion euros ($407bn) in loans and guarantees to help shore up the finances of euro member states such as Greece, Ireland and Portugal.”

January 28 – Bloomberg (Rainer Buergin): “Germany’s Finance Ministry said that Cyprus can only access international aid if it threatens the euro area’s stability, resisting European Central Bank warnings that the island economy might derail progress made in Europe. Providing aid from the euro region’s financial backstops is linked to conditions that must be respected, Finance Ministry spokesman Martin Kotthaus told reporters… It is a legally binding condition of aid that Cyprus is deemed to be systemically relevant to the 17-nation euro area, so the question ‘must be asked,’ he said.”

January 30 – Bloomberg (Brian Parkin): “Germany is adamant that a pre-condition of approving aid for a euro member is that it ‘poses a risk for all of the euro area’, a position that has not changed for the government in Berlin, said chief government spokesman Steffen Seibert… Media reports that Germany softening its stance ‘very misleading’.”

Spain Watch:

January 31 – Bloomberg (Ben Sills): “Dolores de Cospedal, general secretary of Spain’s governing People’s Party, said reports in El Pais newspaper that Prime Minister Mariano Rajoy received illegal payments are false and intended to damage the premier. ‘The only motivation for this so-called information is to damage the PP, its leaders and particularly the prime minister,’ Cospedal said… ‘It’s outrageous what is being done, without any kind of proof.’ El Pais, Spain’s best-selling newspaper, reproduced what it said were extracts from handwritten ledgers by the former PP treasurer… showing payments to party officials including Rajoy, Cospedal and the former managing director of the International Monetary Fund, Rodrigo Rato. The records show Rajoy received 25,200 euros ($34,100) a year for 11 years from a secret fund set up by Barcenas, El Pais said.”

January 30 – Bloomberg (Angeline Benoit): “Spain’s recession deepened more than economists forecast in the fourth quarter as the government’s struggle to rein in the euro region’s second-largest budget deficit weighed on domestic demand. Gross domestic product fell 0.7% in the three months through December from the previous quarter, when it declined 0.3%...”

January 31 – Financial Times (Miles Johnson): “Spain’s prime minister has become embroiled in a growing scandal over secret cash payments to ruling party politicians after a newspaper published what it claimed to be accounts showing payments reaching as high as Mariano Rajoy himself. The Popular Party… again denied that its leaders, including Mr Rajoy, received regular cash payments funded from donations from construction companies, as flames from the corruption allegations licked at the feet of its most senior figures.”

Italy Watch:

January 31 – Financial Times (Guy Dinmore): “Not for the first time, Italy and financial markets appear to be existing in parallel worlds. The campaign ahead of the February 24-25 general election is becoming increasingly fraught with a hung parliament a distinct possibility, a banking scandal surrounding Monte dei Paschi di Siena is widening, and even the most optimistic forecasts for the Italian economy see a contraction of 1% this year. Yet the Milan stock market remains buoyant, and this week the government successfully sold €6.5bn of bonds at the lowest rates for more than two years. Investors are shrugging off the risk of political instability, focusing on hopes that the recession will touch bottom over the next six months and that the eurozone debt crisis is past.”