U.S. Money Market Funds Back in the Bank Funding Game
Given zero or near zero interest rates everywhere, U.S. money market funds keep returning to playing with fire by financing the short-term dollar requirements of euro-land banks – especially French ones. However, not only that, they also hold vast exposure to banks elsewhere.
From a recent Fitch missive on the topic:
U.S. prime money market fund (MMF) exposure to eurozone banks decreased slightly over the most recent reporting period. Despite the decline within the eurozone as a whole, allocations to French banks continued to increase and, as of end-December 2012, represented 6.5% of MMF assets under management within Fitch Ratings’ sample (see chart, Eurozone Banks — Slight Dip, Despite French Increase). For the first time since end-August 2011, France represents the largest single country exposure within Europe. As a percentage of MMF assets, allocations to French banks are at their highest level since end-September 2011.
To be sure, the overall levels don't seem excessive yet by comparison to the summer of 2011, but they represent a quite hefty percentage of MM fund assets even so:
U.S. MM fund assets in short-term European bank paper, via Fitch
What's more, 13.2% of MM fund assets are invested in Japanese bank paper, 12.4% in Canadian bank paper, and 8.9% in Australian bank paper. The latter two are grave risks due to the potential for their real estate and household debt bubbles blowing up, the former is harboring "Abe risk" (i.e., Shinzo Abe inflation and thus, fiscal crisis risk). We're not sure what the MM fund managers are thinking. That they will be able to jump ship at just the right time, as if by magic?
42% of all U.S. MMF assets are concentrated in just 15 banks (as opposed to less than 29% exposure they have to U.S. Treasury debt). Nine of those are Japanese, Australian and Canadian banks, four are European, and two are U.S. banks (JPM) and (BAC).
We can see how the dollar funding problems have by now ended almost completely for European banks by considering euro basis swaps:
3 month, 1 year, 3 year and 5 year euro basis swaps: happy days are here again.
However, our proprietary European bank CDS index has been perking up a bit lately (possibly the recent troubles of Banca Monte dei Paschi di Siena may have something to do with that).
Our proprietary unweighted index of 5 year CDS on the senior debt of eight major European banks – the white line (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito), compared to 5 year CDS on the senior debt of Goldman Sachs (orange), Morgan Stanley (red), Citigroup (green) and Credit Suisse (yellow).
Interestingly, there is still a very wide gap between U.S. and euro-land inflation expectations:
The price of gold (yellow line) versus U.S. (orange line) and euro-land (white line) inflation expectations.
Lastly, here is a chart of the Euro-Stoxx bank index – it could well be that an A-B-C type correction is close to ending, although we can, of course, not be sure of that.
The past two years in the Euro Stoxx bank index, daily. Was the recent rally an a-b-c- corrective move?
Welcome Back, Your Eminence?
The point of all this is to show that current sentiment is the exact opposite of what it was in August to November 2011.
In this context, Bloomberg reports “Bank Bonds Poised to Recapture Pre-Crisis Yield Eminence”. Although the report concerns U.S. banks, the mood in Europe is, if anything, even more bullish. European bank bonds have seen a veritable flood of buyers snapping them up lately:
“Banks are poised to overtake industrial companies as the safest borrowers in the $5.1 trillion U.S. corporate bond market for the first time since the start of the worst financial crisis since the Great Depression.
Investors demand an extra 154 basis points in yield over benchmarks to buy bonds of JPMorgan Chase & Co., Wells Fargo & Co. and other lenders, compared with 138 basis points for companies from Alcoa Inc. to Ford Motor Co., Bank of America Merrill Lynch index data show. At 16 basis points, the gap has shrunk from a peak of 365 in 2009 and may invert as soon as this year based on the current pace of tightening.”
Now, to our mind the balance sheets of big banks remain as opaque as ever. Let us not forget, mark-to-market remains suspended. We know that many of the banks' assets have seen vast improvement, but do they really deserve to be rated as "safer" than industrial companies? That strikes us as rather odd.
As an aside, Moody's has just downgraded six Canadian banks (we're not sure why, but we suspect potential bubble trouble – “high home prices and consumer debt” were definitely mentioned). This information and the next chart come courtesy of “Investment Watch”. The next chart illustrates the state of Spain's mortgage market. Not that it is really surprising, but we thought it is quite instructive: mortgage approvals have now even fallen below the numbers that prevailed before the bubble.
Number of Spanish mortgages approved. A full round-trip from the bubble period, and then some.
So will all this new-found state of financial sector bliss last? We kind of doubt it, but as readers are probably well aware, our skepticism has so far proved, if not ill-founded, then at least "way too early." However, we cannot help it: we simply don't believe that the world can possibly have been made a richer and better place by means of printing wagon-loads of money. It would really be a first.
Post Scriptum: Attacks on Private Banks A Bit Too Popular
Lately, it has become very fashionable to attack the "banksters," especially, or rather almost exclusively, the private ones. Central bankers are considered taboo, they are above all reproach. The Daily Bell has recently published a number of articles taking what one might call a "contrarian stance" on the issue. We think they may be on to something. What all these attacks on bankers appear to have in common is their deeply anti free-market, statist bent. This campaign does smell a bit funny.
We are often criticizing the banking system here, but we sure have no problem with private banks as such. We have a problem with central bank-directed cartelized banking, and we have a problem with the practice of fractional reserve banking (in a truly free banking system -- we believe it may actually die out of its own accord). Here are the links to the Daily Bell articles, which are well worth the read:
“Root for Wall Street to go to Jail” (PBS wants bankers to go to jail, but somehow misses a great many other worthy targets in it campaign)
Icelandic hero Olafur Ragnar Grimsson reconsidered, as he speaks from… Davos? What is the bane of banksters doing in Davos, anyway?
A leftist economist wants to nationalize the banks. Splendid idea, let the State take over banking completely.
The US Senate is at it as well….
Charts by: Bloomberg, Fitch, SocGen, BigCharts