Michigan
Pays 40% More as Detroit Debt Hits Spread: Muni Credit - (www.bloomberg.com) The
yield penalty on Michigan’s debt has climbed 40 percent in less than two weeks
as defaults by Detroit and two school districts lead investors to question the
state’s commitment to protect bondholders. Buyers demand about 0.49 percentage point of extra yield to own general obligations
of Michigan instead of benchmark securities, data compiled by Bloomberg show.
That’s up from 0.35 percentage point on June 13, the day before Detroit
emergency financial manager Kevyn Orr released his plan to avert a record
municipal bankruptcy. The proposal included halting payments on $2 billion of
munis. The month before, school districts in Buena Vista and Pontiac defaulted. They were the
first such issuers in the state to do so, according to research firm Municipal
Market Advisors. The events call into question Michigan’s willingness to
preserve the safety of securities backed by a municipality’s full faith and
credit, said Shawn O’Leary, a senior research analyst inChicago at Nuveen Asset Management, which
oversees $95 billion of local-government debt.
Kevyn
Orr strips absent Charles Pugh of city salary, powers; his car turns up at City
Hall - (www.freep.com) Emergency
manager Kevyn Orr today canceled pay for Detroit City Council President Charles
Pugh and stripped him of all powers of office in an order that maintains health
care benefits for the beleaguered politician. Pugh has been out of public sight
for days and tried unsuccessfully to take a medical leave this week. Orr’s order ends
pay and perks of office for Pugh, but under law, Orr cannot remove him from
office. Orr’s spokesman, Bill Nowling, said the emergency manager decided to
maintain health care benefits for Pugh, noting that the council president put
in a memo on Wednesday seeking a sick leave of up to four weeks, a request Orr
denied.
Risk of 1937 relapse as Fed gives up fight
against deflation - (www.telegraph.co.uk) The
US Federal Reserve has jumped the gun. It has mishandled its exit strategy from
quantitative easing, triggering a global bond rout that it did not anticipate,
and is struggling to control. It has set off an emerging market shock and risks
"blowback" from a fresh spasm of the eurozone debt crisis, and it is
letting all this happen at the same time, before the US economy is safely out
of the woods. It has violated its own counter-deflation strategy, tightening
monetary policy even though core PCE inflation has fallen to the lowest levels
in living memory and below levels deemed dangerous enough in the past to
warrant a blast of emergency stimulus. It is doing so even though the revival
of bank lending has faded. The entire pivot by the Federal Open Market
Committee is mystifying, almost amateurish, and risks repeating the errors made
by the Bank of Japan a decade ago, and perhaps repeating a mini-1937 when the
Fed lost its nerve and tipped the US economy into a second leg of the Great
Depression. "It’s all about tighter policy," was the lonely lament by
St Louis Fed chief James Bullard.
The economic ice age is not over - (www.businessinsider.com) The
"Ice Age," a term Edwards uses to describe a series of economic
cycles characterized by "lower lows and lower highs for nominal economic
quantities," driving a "re-rating of government bonds and the
de-rating of equities – each recovery bringing a partial reversal
to the process and each recessionary phase taking us to shocking new lows,
both in bond yields and in equity multiples. Edwards doesn't think we've
escaped the Ice Age. Instead, he asserts that deflation risks remain high.
He points to persistently low inflation, which the Fed has seemingly dismissed
as transitory, and the crisis unfolding in emerging markets right now, which he
says present a "good chance of a repeat of 1998 where a deflationary wave
of manufactured goods washed up from Asia." The recent surge in bond
yields was driven by a sharp rise in real yields, implying a sharply reduced
outlook for inflation in the marketplace.
Minsheng
Bank tells the story of Beijing's credit worries - (www.reuters.com) Over
the last few years, Minsheng has tapped several lending methods to try and
bolster its returns, including heavy usage of something called a reverse repo,
which allows a bank to mask the amount of money it is putting at risk. The bank
nearly doubled the amount of high-yield investment vehicles it sells, known in
the industry as "wealth management products". Minsheng's borrowing
has prompted concern from analysts, and illustrates the type of banking
behavior the PBOC is trying to stamp out. "Its business model in recent years of leveraging up
the balance sheet with interbank transactions has run its course and is now at
risk of unwinding," Citigroup said on Wednesday in a research note on
Minsheng. Minsheng's lending figures reveal a heavy percentage of loans needing
to be repaid to meet short-term cash outflows -- around 40 percent by one
estimate, compared with zero for some of China's biggest lenders. Investors
have been quick to punish Minsheng, whose Shanghai-listed shares have dropped
16.7 pct, wiping out $6 billion worth in market value, since last Wednesday.
US consumers spend 0.3 percent more in May; Jan, Feb, April
revised lower. - (www.washingtonpost.com)
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