Bloomberg appears to be a paid-up member of the green shoots brigade, if recent stories are any indication. On Monday, the newswire ran a piece trumpeting bond traders’ belief that the memory of Lehman’s collapse was no longer cause for angst:
From Frankfurt to London to New York to Tokyo, bond traders say the Lehman Brothers Holdings Inc. bankruptcy is fading into history as the cost of credit retreats throughout the Group of Seven industrialized nations.
The shock to financial markets from Lehman’s collapse in September sent the Standard & Poor’s 500 Index to its biggest annual decline since 1938, froze credit markets, drove Goldman Sachs Group Inc. to seek $5 billion from Warren Buffett and sparked a run on Treasuries that caused bill rates to fall below zero for the first time.
Now, the record pace of corporate bond sales, declining money market rates and a drop in mortgage costs all suggest the global economy is on the mend. In the government debt market, yields on 10-year notes exceed those of two-year securities by at least 1 percentage point in all the G-7 nations for the first time since before 1991, according to data compiled by Bloomberg. The so-called yield curve typically steepens when traders anticipate a recovery.
Bloomberg also highlighted improvements in Libor (”the offered rate for three-month dollar loans fell to 1.01 percent on May 1, the lowest since June 2003″), the Ted spread (”which rose as high as 4.64 percentage points on Oct. 10, narrowed to 0.86 percentage point today”) and the Libor-OIS premium (”fell to 0.79 percentage point last week, the lowest level since before Lehman’s collapse, from 3.64 percent on Oct. 10″).
Not to mention corporate bonds and mortgages:
Companies have sold about $477 billion of bonds this year in the U.S., compared with $354 billion during the same period of 2008, according to data compiled by Bloomberg. The extra yield investors demand to buy U.S. corporate debt instead of Treasuries narrowed to 6.4 percentage points on May 1 from 8.96 percentage points on Dec. 15, according to Merrill Lynch’s U.S. Corporate & High Yield Master Index.
Rates on 30-year fixed mortgages averaged 1.76 percentage points more than 10-year Treasuries last week, down from 3.07 points on Dec. 19, the highest level since 1986, according to Bloomberg data.
Even the European Commission has gotten in on the recovery game, declaring on Monday that the end of Europe’s recession is in sight. The FT reports:The European economy is in the midst of its deepest and most widespread recession in the post war era,” said Joaquin Almunia, the EU’s economic and monetary affairs commissioner. “But the ambitious measures taken by governments and central banks in these exceptional circumstances are expected to put a floor under the fall in economic activity this year and enable a recovery next year.In short, bullish is the new black.
Here on FT Alphaville however, in keeping with our bearish proclivities, we are obliged to present evidence to the contrary.
Meredith Whitney noted on Friday that,
April capital markets activity returned to relatively inactive levels after what had been interpreted as a first quarter of “green shoots.” Aside from a decent month in high yield activity, most debt and equity product buckets were down both in the US as well as globally.
Total global debt underwriting was down 27% year on year, and total US debt underwriting was down 49% year on year. Specific to the ABS and MBS market, April data showed the 23rd in 24, and 22nd consecutive months of year on year declines. Since the onset of the credit crisis, we estimate that there is just over $2.7 trillion less in liquidity globally, and the US share of that is $2.2 trillion.
And the apparent thaw in global credit markets comes despite weak fundamentals, like jobless indicators hitting record highs and growing underemployment.
Then there are reports that Citi and Bank of America are scrambling to raise $10bn each, while slightly more off-beat indicators like art auctions suggest that whatever bond traders think, the wealthy aren’t quite so convinced:
Ian Peck, principal of Art Capital Group, which lends money against artworks, said: “We have cut our valuations 40-50 per cent since the start of the year. We have seen some absolute forced borrowing but everyone, rich and poor, is facing liquidity problems.”
He said his business had doubled in the past year as wealthy collectors raised money against artefacts rather than selling them in a falling market.
And we haven’t even mentioned swine flu, which may or may not develop into a full blown pandemic. Just like all those green shoots, which may or may not wither in the glare of economic reality.
To quote every economist ever, it’s just too early to tell.
Related links:
“Is the worst behind us? In a word, No.” - Martin Wolf / FT
Japan’s deceptive green shoots - FT
Some more green shoots, China edition - FT Alphaville
How the failure of Lehman is like SARS, and swine flu - FT Alphaville
