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February 05, 2010

The Beginning of the End?
by Doug Noland

For the week, the S&P500 dipped 0.7% (down 4.4% y-t-d), and the Dow slipped 0.5% (down 4.0% y-t-d). The Morgan Stanley Cyclicals declined 1.0% (down 6.5%), and Transports fell 1.9% (down 6.8%). The Morgan Stanley Consumer index dropped 1.5% (down 3.8%), and the Utilities fell 2.1% (down 7.0%). The Banks sank 3.7% (up 4.9%), and the Broker/Dealers fell 1.0% (down 4.3%). The S&P 400 Mid-Caps dipped 0.8% (down 4.1%), and the small cap Russell 2000 dropped 1.5% (down 5.2%). The Nasdaq100 rallied 0.3% (down 6.1%), and the Morgan Stanley High Tech index gained 1.2% (down 6.6%). The Semiconductors recovered 1.2% (down 11.1%). The InteractiveWeek Internet index increased 0.6% (down 6.2%). The Biotechs gained 0.3% (up 2.6%). Although bullion was down about $15, the HUI gold index rallied 4.1% (down 9.4%).

One-month Treasury bill rates ended the week at 2 bps, and three-month bills closed at 9 bps. Two-year government yields fell 3 bps to 0.69%. Five-year T-note yields dropped 9 bps to 2.16%. Ten-year yields declined 2 bps to 3.57%. Long bond yields increased 3 bps to 4.52%. Benchmark Fannie MBS yields decreased 4 bps to 4.30%. The spread between 10-year Treasury and benchmark MBS yields narrowed 2 to 73 bps. Agency 10-yr debt spreads widened 4 to 40 bps. The implied yield on December 2010 eurodollar futures declined 6 bps to 0.93%. The 10-year dollar swap spread decreased 2.5 to 10.0, and the 30-year swap spread decreased 3.75 to negative 14.25. Corporate bond spreads were somewhat wider. An index of investment grade bond spreads widened 4 to 100 bps, and an index of junk spreads widened 3 to 494 bps.

Investment grade issuers included Kraft Foods $8.5bn, Williams Partners $3.5bn, PNC Funding $2.0bn, Procter & Gamble $1.25bn, Valero Energy $1.2bn, Wisconsin Electric $530 million, Florida Power & Light $500 million, Pacific Lifecorp $450 million,Building Materials Corp $250 million, GATX $250 million, and North American Development Bank $250 million.

The list of junk issuers included Denbury Resources $1.0bn, McClatchy $875 million, Crosstex Energy $725 million, Readers Digest $525 million, Manitowoc $400 million, Hilcorp Energy $300 million, Omega Healthcare $200 million, and CNG Holdings $200 million.

I saw no convert issues.

International dollar debt issuers included Asian Development Bank $2.5bn, Lithuania $2.0bn, Bank of China $1.6bn, Council of Europe $1.0bn, Korea Development Bank $750 million, Coca-Cola Femsa $500 million, Corp Pequera $175 million and Banco Pine $125 million.

U.K. 10-year gilt yields declined 3 bps to 3.88%, and German bund yields dropped 8 bps to 3.12%. Bond yields in Greece fell 23 bps to 6.62%. The German DAX equities index declined 3.1% (down 8.8% y-t-d). Japanese 10-year "JGB" yields rose 5 bps to 1.36%. The Nikkei 225 dipped 1.4% (down 4.6%). Emerging markets were on the defensive. For the week, Brazil's Bovespa equities index was hit for 4.0% (down 8.5%), and Mexico's Bolsa slipped 0.6% (down 4.6%). Russia's RTS equities index fell 3.8% (down 2.1%). India's Sensex equities index sank 3.5% (down 9.6%). China's Shanghai Exchange declined 1.7% (down 10.3%). Brazil's benchmark dollar bond yields rose 8 bps to 5.35%, while Mexico's benchmark bond yields dipped one basis point to 5.18%.

Freddie Mac 30-year fixed mortgage rates increased 3 bps to 5.01% (down 24bps y-o-y). Fifteen-year fixed rates added one basis point to 4.40% (down 52bps y-o-y). One-year ARMs sank 7 bps to 4.22% (down 70bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 2 bps to 5.90% (down 105bps y-o-y).

Federal Reserve Credit declined $3.3bn last week to $2.231 TN. Fed Credit was up $391bn, or 21.2%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 2/3) fell $1.3bn to $2.947 TN. "Custody holdings" expanded $392bn, or 15.4%, over the past year.

M2 (narrow) "money" supply increased $6.0bn to $8.464TN (week of 1/25). Narrow "money" expanded 1.7% over the past 52 weeks. For the week, Currency added $0.8bn, and Demand & Checkable Deposits rose $11.3bn. Savings Deposits gained $6.2bn, while Small Denominated Deposits declined $6.0bn. Retail Money Funds fell $6.3bn.

Total Money Market Fund assets (from Invest Co Inst) declined $13.5bn to $3.205 TN. Over the past year, money fund assets dropped $702bn, or 18.0%.

Total Commercial Paper outstanding sank $24.2bn last week to $1.123 TN. CP dropped $463bn over the past year (29.2%). Asset-backed CP dipped $1.7bn last week to $429bn, with a 52-wk drop of $305bn (41.5%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.079 TN y-o-y, or 16.0%, to $7.814 TN.

Global Credit Market Watch:

February 5 - Bloomberg (Paul Dobson): "The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so-called European peripheral nations including Greece and Portugal, Deutsche Bank AG said. 'The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,' Jim Reid, a strategist at Deutsche Bank in London, wrote..."

January 25 - Financial Times (David Oakley): "European governments will need to borrow a record €2,200bn from capital markets this year to finance budget deficits. The projected borrowing is a 3.7% increase on the €2,120bn raised in 2009... This will put pressure on public finances as yields and volatility are set to rise."

January 27 - Bloomberg (Shannon D. Harrington and Abigail Moses): "Traders are buying protection against defaults on sovereign debt at more than five times the rate of company bonds as governments fund ballooning deficits. The net amount of credit-default swaps outstanding on 54 governments from Japan to Italy jumped 14.2% since Oct. 9, compared with 2.6% for all other contracts... European countries led the jump of protection on Portugal climbing 23%, Spain 16% Greece 5%."

January 28 - Bloomberg (Gillian Wee): "U.S. universities boosted their long-term debt by 54% in the year ended June 30... Universities, on average, had $167.8 million in debt in the 12 months ended June 30, with the biggest borrowing done by endowments with more than $1 billion in assets, according to... the National Association of College and University Business Officers and Commonfund..."

Global Government Finance Bubble Watch:

February 3 - Bloomberg: "China Investment Corp., the nation's $300 billion sovereign wealth fund, may get at least $250 billion in extra funds before the Feb. 14 Chinese New Year, according to Z-Ben Advisors Ltd. CIC is likely to invest the cash in the first quarter with 60% or more of the new funds to be allocated to third- party fund managers, according to... Z-Ben Advisors, a... company that provides research on China's fund-management industry."

February 5 - Bloomberg (Shiyin Chen and Chan Tien Hin): "Emerging market equity funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks... EPFR Global said. Investors removed almost $1 billion from global emerging market stock funds in the week..."

January 28 - Bloomberg (Jon Menon): "The British government is seeking to raise more cash by selling its 71.5 billion-pound ($116 billion) stake in three crippled banks than Margaret Thatcher generated by disposing of state-owned businesses during her entire 11 years in office. From 1979 to 1990, then-Prime Minister Thatcher's three administrations privatized more than 20 companies, including British Gas and British Airways. The total raised would now be worth about 68.5 billion pounds, adjusted for inflation... Prime Minister Gordon Brown hasn't disclosed a timetable for the sale of the U.K.'s stakes in Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and Northern Rock Plc... 'It's such a huge stake, it will clearly dominate the political agenda,' said Tom Kirchmaier, a fellow at the London School of Economics. 'Any government will probably have a substantial stake for a long time."

January 26 - Bloomberg (Caroline Hyde, Anchalee Worrachate and Sonja Cheung): "Greece sold 8 billion euros ($11.3bn) of bonds at premium yields to ensure the country's first debt issue since being downgraded was a success. The five-year securities yield 6.2%... The ministry said it received 25 billion euros in orders.... Prime Minister George Papandreou's government is struggling to reduce a budget deficit of 12.7% of gross domestic product and needs to sell 53 billion euros of debt this year, the equivalent of about 20% of GDP."

Currency Watch:

The dollar index jumped 1.2% this week to 80.44. For the week on the upside, the Japanese yen increased 1.4% and the Brazilian real 0.8% For the week on the downside, the British pound declined 2.2%, the South African rand 2.1%, the Australian dollar 1.7%, the New Zealand dollar 1.6%, the Euro 1.3%, the Danish krone 1.3%, the Swiss franc 1.1%, the Singapore dollar 1.1%, the Norwegian krone 1.0%, the Swedish krona 0.8%, and the South Korean won 0.7%.

Commodities Watch:

January 27 - Bloomberg: "China's $300 billion sovereign wealth fund is considering new investments in resource-related companies after bets on commodities producers from the U.S. to Kazakhstan paid off in 2009... 'They have timed the upside well both in market terms, but also to fit in with the longer-term diversification strategy,' Randolph said. CIC has had 'early' talks for direct investments in Brazil, the world's second-biggest iron-ore exporter, and Mexico, the No. 2 silver producer, CIC Chairman Lou Jiwei said... Lou pumped about $10 billion into commodity-related companies in the second half of 2009... With China's reserves at $2.4 trillion and swelling by an average of $37.8 billion a month last year, CIC has asked the government for another $200 billion, the Economic Observer reported..."

The CRB index sank 2.7% (down 8.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 2.2% (down 9.3% y-t-d). Gold declined 1.3% to $1,066 (down 2.8% y-t-d). Silver was slammed for 8.4% to $14.83 (down 12.0% y-t-d). March Crude sank $1.70 to $71.19 (down 10.3% y-t-d). February Gasoline declined 1.4% (down 8.1% y-t-d), while February Natural Gas jumped 7.5% (down 1.0% y-t-d). March Copper lost 6.4% (down 14.6% y-t-d). March Wheat slipped 0.2% (down 12.6% y-t-d), and March Corn declined 1.4% (down 15.2% y-t-d).

China Bubble Watch:

January 26 - Bloomberg: "Chinese banks have begun restricting new loans, responding to a push by regulators to contain credit after a surge in lending in the first half of this month. Bank of China Ltd. has stopped extending new corporate loans in the Shanghai area, except for clients who have repaid earlier borrowings... China Construction Bank Corp.'s branch in the city has been told to screen applications for personal loans and mortgages more carefully and to stop new lending once a monthly quota is met... 'This round of quantitative tightening seems to be more serious than we thought after Beijing was shocked by the lending figures in the first two weeks of this year,' Credit Suisse economist Dong Tao wrote... 'We would not be surprised if banks imposed a monthly lending quota, as against a quarterly quota in 2008."

February 3 - Bloomberg: "China's imports may have jumped in January by the most since at least 1991, strengthening Asia's economic recovery, according to China International Capital Corp. Imports doubled from a year earlier... economist Xing Ziqiang estimated... Rising commodity prices and strong demand within the world's third-biggest economy helped to drive the increase, Xing said..."

February 5 - Bloomberg: "China's government netted 1.6 trillion yuan ($234 billion) from land sales last year, or 40% of the cost of the nation's two-year stimulus package. The figures... Showed state land sales rising to a record, helping to fund the 4 trillion-yuan plan."

February 3 - Bloomberg (Wendy Leung and Liza Lin): "China Southern Airlines Co. and Air China Ltd., two of the nation's big three carriers, said they will back a domestic planemaker challenging Boeing Co. and Airbus SAS in the world's fastest-growing aviation market. 'We are a state-owned company, of course, we support the C919,' China's first narrow-body plane, China Southern's Executive Vice President Dong Suguang said... 'If the government needs us to buy, we will.'"

February 3 - Bloomberg: "China's government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans... The China Banking Regulatory Commission warned lenders of the risks associated with 'hot money' flowing into the property market... Tighter rules on third mortgages 'should have some effect on home prices, especially in regions such as Hainan,' said May Yan, a...analyst at Nomura International HK Ltd."

February 3 - Bloomberg: "China's property market 'bubble' is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie. As bank lending slows, 'it's very difficult to see this demand continuing...' Tougher property policies may lower 2010 sales volumes 10%, compared with an earlier forecast for growth of as much as 5%, BNP Paribas said... Residential and commercial property prices in 70 Chinese cities rose 7.8% in December from a year earlier, the fastest pace in 18 months..."

Japan Watch:

February 3 - Bloomberg (Aki Ito and Marco Babic): "Japan now relies on Asia as the destination for more than half of its exports, a shift that underscores the waning global role of the U.S. and Europe. ...exports to Asia were 54.2% of Japan's shipments abroad in 2009, exceeding 50% for the first time. Exports to China, now the country's single biggest market, made up 18.9%, more than the 16.1% sent to the U.S. and 12.5% to Europe..."

January 26 - Bloomberg (Keiko Ujikane): "Japan's sovereign credit rating outlook was lowered by Standard and Poor's on concern Prime Minister Yukio Hatoyama's administration lacks a plan to rein in the world's largest debt load. 'The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected," S&P said... Japan's rating could be lowered from the current AA, the third highest, if economic data "remain weak" and measures to buttress growth "are not forthcoming," the company said."

India Watch:

January 27 - Bloomberg (V. Ramakrishnan and Anil Varma): "India's investment managers are selling bonds and putting their funds in money markets, anticipating losses in longer-term debt as inflation quickens and the budget deficit grows."

Asia Bubble Watch:

February 3 - Bloomberg (Shelley Smith): "The Asia-Pacific Loan Market Association opens the first global conference in its 12-year history today, luring bankers to a region whose lenders lost less than their U.S. and European peers in the financial crisis. The credit freeze following Lehman Brothers Holdings Inc.'s 2008 failure was 'more of an occidental crisis than an oriental crisis,' Philip Cracknell, global head of syndications at... Standard Chartered Plc, said... 'Asia has been less affected, and there's a transition of economic power from West to East in the new world order that's developing.' Asian financial companies had $42.3 billion of losses and writedowns since the U.S. subprime mortgage market collapsed in 2007, according to... Bloomberg. That's less than 8% of the losses recorded in Europe and below 4% of the Americas tally..."

January 26 - Bloomberg (Seyoon Kim): "South Korea's economic growth slowed more than estimated in the fourth quarter, signaling the government may escalate pressure on the central bank to hold off on raising the benchmark interest rate. Gross domestic product increased 0.2%.... after climbing 3.2% the previous quarter..."

Latin America Bubble Watch:

January 25 - Bloomberg (Anuchit Nguyen): "Brazil's economy is 'more sustainable' than China's because its exports of raw materials from metals to crops make it more resilient, investor Mark Mobius said... 'Brazil's economy is more sustainable because they don't have to import anything. China has to import oil, iron ore and foods,' said Mobius... 'Brazil is in a situation where it has tremendous resources. Not only mineral resources, but agricultural resources.'"

January 28 - Bloomberg (Adriana Brasileiro): "Brazil's unemployment rate in December equaled a record low ... Unemployment fell to 6.8% in December, tying a record low set a year earlier... Brazil's $1.6 trillion economy is boosting jobs and showing signs of expansion fueled by ten straight months of credit expansion, tax cuts and record low borrowing costs."

February 3 - Bloomberg (John Quigley): "Banco Internacional del Peru, Peru's fourth-largest bank, plans to expand loans by 40% this year as the Andean nation's economy recovers. Peruvian companies are likely to increase investment in infrastructure, mining and construction projects this year, spurring demand for credit..."

January 26 - Bloomberg (Daniel Cance): "Venezuelan President Hugo Chavez is selling dollars from central bank reserves for the first time in six years in what Goldman Sachs Group Inc. and Barclays Plc say is a futile bid to shore up the bolivar in unregulated trading...The plan will fail because Chavez's nationalizations and land seizures are prompting Venezuelans to pull money from the country, said Alberto Ramos, a Goldman Sachs economist. More than $93 billion has left the South American nation since 2005..."

Unbalanced Global Economy Watch:

January 26 - Bloomberg (Scott Hamilton): "The U.K. economy resumed growth by less than economists forecast in the fourth quarter as service industries and manufacturing expanded just enough to pull Britain out of its longest recession on record. Gross domestic product rose 0.1% from the third quarter..."

January 28 - Bloomberg (Patrick Donahue and Christian Vits): "German unemployment rose for the first time in seven months... The jobless rate rose to 8.2% from 8.1%."

January 26 - Bloomberg (Johan Carlstrom and Kati Pohjanpalo): "Sweden's trade surplus widened in December, boosted by export demand from countries outside of the European Union. The... surplus widened to 5 billion kronor ($690 million) from 1.9 billion kronor in November... Sweden is poised to benefit from resurgent trade demand in Asia and western Europe."

January 27 - Bloomberg (Jacob Greber): "Australian consumer prices rose more than forecast... The consumer price index climbed 0.5% in the fourth quarter from the previous three months, when it gained 1%... A separate report today showed an Australian index of leading economic indicators rose in November at the fastest pace in two years."

February 3 - Bloomberg (Tracy Withers): "New Zealand's unemployment rate soared to the highest level in more than 10 years in the fourth quarter... The jobless rate increased to 7.3% from 6.5% in the previous three months..."

U.S. Bubble Economy Watch:

February 3 - Bloomberg (Bob Willis): "Service industries in the U.S. expanded less than anticipated in January, a sign the recovery will be slow to spread from manufacturing to the rest of the economy... 'Manufacturing is getting an awful lot of help, and it looks like the rest of the economy is getting awfully dull growth,' said Robert Mellman, an economist at JPMorgan Chase..."

February 3 - Bloomberg (Mike Ramsey): "Mercedes-Benz's U.S. sales surged 45% in January, leading luxury-auto makers as the Daimler AG unit outsold Bayerische Motoren Werke... and almost passed Toyota Motor Corp.'s Lexus.... Lexus, the top-selling U.S. luxury-auto brand, rose 5.4% from a year earlier to 15,517. BMW posted a 7.6% gain to 13,163."

Central Bank Watch:

January 27 - Bloomberg (Craig Torres and Brendan Moynihan): "The Federal Reserve is considering adopting a new benchmark interest rate in what may be the most significant change in monetary policy in 30 years... War II, with former Fed Chairman Paul Volcker's money supply experiment shaded. 'The question for the Federal Reserve is what is the most efficient way to get your policy rate into other short-term interest rates,' said Marvin Goodfriend, an economist at Carnegie Mellon University and former Richmond Fed policy adviser."

Fiscal Watch:

January 27 - Bloomberg (Brian Fale): "The Senate's defeat... of a plan to create a special debt commission shows how difficult it will be for Washington to chip away at the federal government's trillion-dollar deficits. The chamber rejected the push by some lawmakers to establish a panel whose recommendations on reducing budget shortfalls would be guaranteed floor votes in the House and Senate... Also, yesterday's Senate vote coincided with a new government report projecting that this year's deficit will total $1.35 trillion."

January 27 - Bloomberg (Dawn Kopecki and Theo Francis): "The Obama administration's $300 billion Hope for Homeowners program may be retooled to help the growing number of Americans who owe more than their properties are worth... The changes would be at least the third lease on life for the program, which began in October 2008... Hope for Homeowners could be expanded to more directly help borrowers with negative equity. 'The Hope for Homeowners program is unique in that it involves equity writedowns, principal balance reductions to help the underwater borrower,' Stevens said. 'We're going to look at that program very closely to make sure it can be as effective as possible, because that's another segment of the population that needs to be addressed."

Real Estate Watch:

January 28 - Bloomberg (Dan Levy): "Las Vegas homeowners had the highest U.S. foreclosure rate last year, and California and Florida cities accounted for 17 of the nation's 20 worst markets... Rising foreclosure rates in Utah, Illinois, Oregon and Arkansas metropolitan areas showed home-loan distress spreading to 'previously insulated areas... RealtyTrac Inc. said... A record 3 million homes will probably be seized this year, RealtyTrac has forecast. 'The dam will break and we'll see a significant increase in foreclosures,' Michael Lea, a finance professor at San Diego State University, said... 'The banks can't continue to hope the economy starts growing.'"

Muni Watch:

January 26 - Bloomberg (Terrence Dopp): "New Jersey, the third-most indebted U.S. state, faces a $2 billion budget gap in the current fiscal year, the Office of Legislative Services said. The figure is double the estimate of former Governor Jon Corzine. Revenue will fall $1.2 billion below target in the period ending June 30, while rising joblessness and other fallout from the U.S. recession will force the state to spend $669 million more than anticipated on social services..."

January 26 - Bloomberg (Jeremy R. Cooke): "Public school systems would get federal cash subsidies instead of tax credits to lure investors to their debt under a plan before Congress... The change to the Qualified School Construction Bond program, which won House approval in December, has a 'very high' chance of passing the Senate, said John Buckley, chief tax counsel for the panel... 'It is a way of turning what was a niche product into a broad-based product because the investor in the School Construction Bond would be no different than an investor in the Build America Bond,' Buckley said..."

New York Watch:

January 25 - Bloomberg (Henry Goldman): "New York City faces $1.3 billion in cuts and would have about 19,000 fewer city employees under the state budget that New York Governor David Paterson proposed for next fiscal year... The city, with a budget of about $60 billion, faced a $4.1 billion deficit in the 2011 fiscal year beginning July 1, without accounting for reduced state aid."

Crude Liquidity Watch:

February 3 - Bloomberg (Fiona MacDonald): "Kuwait plans to spend about 16 billion dinars ($56bn) in the fiscal year starting April 1, one-third more than the current year as oil prices rise... Gulf countries are boosting spending to help their economies recover after the global recession, encouraged by oil prices which have almost doubled in the past year... Saudi Arabia, Qatar and Abu Dhabi have announced plans to spend $600 billion by 2013."

January 26 - Bloomberg (Robert Tuttle): "Qatar's economy will grow 16% this year, up from 9% in 2009... The outlook for Qatar and other Persian Gulf economies 'has improved considerably during the past few months, benefiting from the increase in oil prices,' al- Thani said... Crude oil has averaged almost $80 a barrel this month, nearly double the year-earlier figure..."

The Beginning of the End?

I apologize, but I had only limited time available today to write. I'll return to my regular schedule next week - and at this time I assume my topic will be "a global reflation update."

Recent tumult in periphery European debt markets has reignited global crisis fears. The dollar's rally and commodities' downturn have some analysts again talking deflation. The hot emerging markets have certainly chilled. In China, authorities are imposing some controls on bank lending. Have the Chinese become serious about reining in financial excess? Will their efforts - purposely or otherwise - pierce China's Credit Bubble? Are sovereign debt troubles and China tightening a harbinger for global reflation's demise?

What role have the leveraged speculators played in recent weakness across global risk markets? How crowded was the global reflation trade? Has it been a case of everyone caught in similar positions? Have "non-correlated" trades become highly correlated? It is when a series of trades abruptly moves against the complacent crowd that the more aggressive players find themselves in trouble and forced to liquidate into unfriendly markets. And there is nothing like forced liquidations to really get some animal spirits aroused. It's a dog-eat-dog world.

How big is the so-called "dollar carry trade"? The yen carry trade? How important of a source of liquidity have these leveraged trades been to the global markets and economies?

How much of an impact will global market unrest have on our fragile recovery? The stock market has been under pressure - and that's not so helpful for already fragile confidence. Yet, how much of an offset is provided by declining Treasury and mortgage-backed yields? How much benefit will the stronger dollar provide in the way of lower energy and import costs? Notably, there has been so far only limited widening of U.S. risk premiums. Is this an indication of U.S. system resiliency - or complacency?

In spite of global market tumult, this week provided yet another big week of U.S. corporate debt issuance. It is worth noting that junk bond spread closed today at 494bps, only 3 bps wider for the week. Junk spreads have barely budged from January lows (487bps) and remain significantly below the high of 1,300 recorded last March. Investment grade spreads are also less than half of the levels from last spring. And while they have widened marginally, emerging market debt spreads are not far off 15-month lows. Brazil and Mexico can still borrow for 10 years at not much over 5%. For the most part, financial conditions remain loose.

Five-year Treasury yields are back down to 2.15%. Is this an indication of ongoing global deleveraging and powerful deflationary forces? Or are rock-bottom Treasury and bund yields instead indicating unrelenting global liquidity excess? Do unsettled global markets work to keep central bankers timid and monetary policy ultra-loose? How closely are Chinese following global market developments? Is the recent pullback in global risk markets the beginning of the end for global reflation or the pause that refreshes? Next week I'll dive into what is an exceptionally challenging analytical task.

Doug Noland
The Credit Bubble Bulletin
PrudentBear.com

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