Monday, July 9, 2007

[Latest Global Dollar Liquidity Measure: +15.5% annual growth rate; latest Endogenous Liquidity Index: -0.8%]

- The CDO Put at work, again. According to the Daily Institutional Investor, HSBC is in the early stages of marketing "a managed synthetic corporate collateralized debt obligation to Asian investors called Maple Hill II. The deal was structured in New York, contains largely European and U.S. investment-grade underlying and is getting global distribution. Seven-and-a-half-year and 10-year notes are available and the deal is managed by U.S.-based Babson Capital".

"The portfolio references 136 high quality global corporate credits with a 10% cap in high-yield credits". Interestingly enough, Asia appears to be the source of demand: "... there has been consistent demand for this type of deal, particularly from Japan and Korea. She added that HSBC also has a lot of new Asian accounts from places such as China, Philippines, Thailand and Malaysia looking to get into structured credit, and who look to this sort of product for its diversity and relatively high yield".

- PIMCO's Tomoya Masanao on global liquidity. From a global liquidity point of view, this piece contains three interesting elements. [1] The changing face of the New Bretton Woods: "Currency reserves in China and other Asian countries have been a very important factor in containing risk premiums in the financial markets. These countries have been using their reserves to buy U.S. Treasuries and other high quality bonds in an effort to maintain currency pegs versus the U.S. dollar ... This evolution [i.e. investing in riskier assets via "sovereign wealth funds"] is already occurring and will accelerate over our secular horizon".

"This evolution, coupled with our global growth outlook, suggests a positive environment for riskier assets, notably stocks, real estate and commodities. That environment is unfortunately not very positive for high quality bond markets like U.S. Treasuries". [2] Towards a more balanced global business cycle? "One important change in our outlook is simply that we recognize global aggregate demand is becoming less U.S.-centric and that domestic demand in emerging markets is continuing and accelerating, which in turn is feeding growth, particularly in Europe and Japan".

"We now believe that global aggregate demand will be less dependent on U.S. consumption because of the growth in emerging markets. As the emerging markets become an increasingly important driver of global aggregate demand, the rest of the world will benefit from emerging market growth, particularly Japan and European countries". [3] The recognition of endogenous liquidity. "A second factor that led us to a different conclusion this year is the recognition that the higher asset prices, tighter credit spreads and lower bond yields we have experienced in the last three to five years have eased financial conditions globally. This global liquidity has largely offset central bank tightening in developed countries like the U.S".

- Bennet Sedacca on global liquidity & M3. Bennet Sedacca and a confession: "I couldn't have said better myself ... the market has been driven by excess global liquidity". After this promising start, Mr. Sedacca surprises with a mention of the now-defunct M3 monetary measure. I have written about this a couple of times already, but let me take the opportunity to repeat one of the key "commandments" of liquidity watchers: M2 and M3 are not liquidity measures. Moreover: they sometines act as indicators of il-liquidity — remember 1998 in the U.S.

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