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Credit Markets Warning Signal, Foreign Demand for US Treasury Falls

The following story represents perhaps the largest obstacle facing equity market integrity today.  The previous statement is not hyperbole. The collapse of equity prices in 2008 was presaged by a python-like constriction of credit. If the private sector cannot access credit then business grinds to a halt and as we saw in 2008 economic cataclysm ensues… 

Credit markets flash hottest warning signal since crisis

European credit markets are flashing the most serious warnings signs in a year as the yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months.

The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. “This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit’s credit analyst.

The rating agency Moody’s said market ructions have led to a “material” rise in borrowing costs over the last month, prompting the cancellation of debt issues by the Dutch energy group New World Resources, Italy’s Snai betting group, and the UK’s Travelport. Sixteen companies wordwide have pulled debt issues worth a $7.3bn (£4.66bn) since mid-January, including Canada’s Bombardier.

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…Will the Sovereign debt issues of Europe migrate across the pond?  The following story suggests the answer may be yes. The lack of foreign demand for US debt will have the effect of increasing rates. However, since an increase in rates would be the death knell of our supposed economic recovery we would expect the Fed to attempt to fill any gap foreigners create. These actions would be, of course, US$ bearish. So while the talk of an end to Q.E. intensifies reality of the situation suggests otherwise….  

Foreign demand falls for Treasuries – Financial Times 

Financial Times reports foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday. China sold $34.2 bln in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8 bln. China overtook Japan as the largest holder in September 2008. The shift in demand comes as countries retreat from the “flight to safety” strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest. For China, the shedding of US debt marks a reversal that it signalled last year when it said it would begin to reduce some of its holdings.

“Credit is a system whereby a person
who cannot pay gets another person
who cannot pay to guarantee that he can pay …”
Charles Dickens (1812-1870)

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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