Credit Writedowns

Retail savers in the US are abandoning certificates of deposits (CDs). The amount of CDs outstanding that are $100K or smaller has been on a sharp decline since the recession and is now at the lowest level since the Fed began keeping track of these balances.

As Merrill’s junk bond index yield crossed the historical low of 5% on Thursday, some senior Fed officials are clearly becoming uneasy. Corporate credit markets are entering bubble territory (see discussion) and up until recently very little has been said on the topic by the US central bank. On Friday Ben Bernanke sent a signal to the markets that the Fed is watching the “reaching for yield” situation “particularly closely”.

Analysts’ latest adjustments to corporate earnings forecasts for Japanese firms show many more upward than downward revisions. Merrill Lynch tracks the “number of stocks for which consensus EPS estimate has risen vs. the number for which it has fallen” over a 3-month period. That ratio (chart below) has spiked relative to other nations.

Since we’ve never been at these yield levels, this is uncharted territory in corporate bond pricing. Certainly bond spreads have been lower in the past – especially during the boom years. But in the post-crisis era, corporate spreads seem to have found a floor.

It seems that the markets are discounting many of the risks that have plagued Ireland’s economy in recent years. Ireland’s stock market has significantly outpaced the S&P500 in the last few months – ISEQ is up 20% over the past year.

Whatever the case, the ECB will have to act in order to avoid the dangers of a deflationary spiral, which could take the Eurozone years (or even decades) to exit.

Some recent data out of Canada points to a slowdown in growth of consumer indebtedness. According to RBC, the non-mortgage consumer debt has grown at the slowest rate in 20 years. This is clearly a positive development, but when taking mortgage debt into account, Canadians still represent some of the most indebted households in the developed world.

The Bank of Japan is taking the concept of quantitative easing to a whole new level. Unlike the Fed who is only focused on treasuries and agency MBS securities, the BOJ is authorized to purchase ETFs and REITs in addition to JGBs.

By Sober Look As European banks find some private sources of capital to fund themselves, they continue to repay their ECB loans – particularly in the 3y LTRO program. FoxBusiness: – Next week, nine banks will repay just over 4 billion euros … in loans during the first round of three-year financing in late 2011, ECB data showed Friday. Eleven [...]

By Sober Look As discussed earlier (see post) the French economy continues to struggle. The nation’s consumer recession is now thought to be worse than Italy’s. Markit (Trevor Balchin): – “France has overtaken Italy as having the worst performing retail sector of the three largest euro area economies. Sales fell at a survey-record pace, as did employment. Italy registered another [...]

Analysts are beginning to raise concerns about Canada’s near-term economic growth. The nation’s central bank is holding the overnight rate at 1% and will likely maintain this level for some time to come.

Sub-investment-grade loans continue to perform well, driven by demand for floating rate product. As an example, the chart below compares the performance of Invesco’s “Senior Income” fund (VVR) – which mostly holds loans of non-investment-grade companies – with HYG (iShares junk bond ETF) and an S&P500 ETF.