Rising U.S. bond yields may spark Credit Crisis II

NEW YORK (Reuters) - The global financial crisis may morph into a second, equally virulent phase where borrowing costs rise again, hobbling an embryonic economic recovery, debilitating cash-strapped banks, and punishing investors all over again.

Early warnings signs of this scenario include surging government bond yields, a slumping U.S. dollar, and the fading of the bear market rally in U.S. stocks.

Optimists hope that a fragile two-month rally in world stock markets, a rise in U.S. Treasury yields from record lows during the depths of the crisis in late 2008, and some less scary economic data all signal that a recovery is around the corner.

But gloomy analysts insist that thinking is delusional.

Once Credit Crisis Version 2.0 ramps up, foreign investors may punish the U.S. government for borrowing trillions of dollars too much by refusing to buy its debt until bond prices plunge to much cheaper levels.

The telling harbinger is benchmark Treasury note yields' surge to six-month highs around 3.75 percent this week, as investors began to balk at the record U.S. government borrowing requirement this year.

The U.S. Treasury plans to sell about $2 trillion in new debt this year to fund a $1.8 trillion fiscal deficit.

Heavy selling of U.S. dollar-denominated assets could trigger a full-blown currency crisis and usher in surging inflation, forcing mortgage rates and corporate bond yields up, undermining any rebound in economic activity.

"The financial crisis is a downward spiral with two twists," said George Feiger, chief executive of Contango Capital Advisors in Berkeley, California.

First came the banking crisis and a huge contraction of credit, starting in mid-2007 which resulted in the stock market panic of 2008 which triggered the deepest U.S. recession in at least two decades.

"Once you have got a recession you have good old-fashioned credit losses," Feiger said. "The second leg is now the consequences of the massive recession and it is just now working its way out," he said.

Investors, many of them foreigners who own a large chunk of the U.S. Treasury market, are steadily demanding higher yields.

The price of the historic rescues of banks, insurers, manufacturers, and securities markets, to prevent a complete collapse during the worst financial crisis since the Great Depression, has meant a record U.S. government borrowing requirement.

But by issuing so much debt, the United States risks repulsing a critical buyer: foreign central banks, who own more than a quarter of marketable U.S. Treasuries. China recently overtook Japan as the biggest such buyer.

"We are getting into that stage which I call 'the markets revenge'", said Martin Weiss, president of Weiss Research Inc. in Jupiter, Florida.

Weiss, known for his especially pessimistic views on the banking system and economy, recently published a book entitled: "The Ultimate Depression Survival Guide".

"The market attacked anyone who had the toxic assets," he said.

Now, foreign investors' primary target is the U.S. government because it has bought many of the tarnished securities from banks and some of the failing institutions itself, but the selloff will soon spread to all U.S. dollar-denominated assets, Weiss expects.

Selling could push up the 10-year Treasury note's yield to about 6.0 percent Weiss warns. For now, he urges investors to stash much of their savings in short term Treasury bills, which carry minimal interest rate risk.

Foreign investors are running out of patience with the U.S. government's debt issuance, he argued.

"What happened at the end of this month is the beginning of the end of that goodwill period," Weiss said. "There could be a major near-term selloff in the dollar."

This month, the euro has gained nearly 7.0 percent against the U.S. dollar. Meanwhile, the benchmark ten-year U.S. Treasury note's yield has surged to six-month highs around 3.75 percent, nearly doubling from its lowest level in 50 years of 2.04 percent seen last December.

Ultimately, corporate bond yields, although still at very wide yield spreads of more than four percentage points above Treasuries according to Merrill Lynch data, will also spike again, Weiss warned. The S&P 500 stock index may fall to 500 points in this next phase of the crisis he added, down from 911 points early on Friday, he said.

On the other hand, many economists reckon the U.S. government and Federal Reserve have averted a rerun of the Great Depression by swiftly orchestrating financial rescues and monetary and fiscal stimulus to offset sagging consumer spending.

Yet even as the U.S. economy and banking system struggle to recover from two years of turmoil, Europe's banks are even more debilitated, raising the threat of a second global systemic crisis spreading back across the Atlantic to the United States, some analysts fear.

"I think the most likely origins for a major crisis would be beyond our borders," said David Levy, chairman of the Jerome Levy Forecasting Center in Mount Kisco, New York.

Russia Supports Gold as Part of IMF SDR

MOSCOW, March 28 (Reuters) - Russia supports expanding the IMF's Special Drawing Rights (SDR) to include the rouble, the yuan and gold, but sees no chance of the G20 Summit accepting a new reserve currency, a Kremlin aide said on Saturday, agencies reported.

"It would be logical for the set of currencies (that make up the SDR) to be expanded, and it could include other currencies, including the rouble, the yuan and perhaps others," state RIA news agency reported the Kremlin's senior economic aide Arkady Dvorkovich as saying.

China this week caused a stir ahead of the April 2 Group of 20 meeting of rich and emerging economies when it suggested the world move towards greater use of the International Monetary Fund's Special Drawing Rights, created by the IMF in 1969 as an international reserve asset.

G20 leaders have made clear that for now the dollar's status as the dominant reserve unit remains, but the idea of creating a new reserve currency system based on SDRs has not entirely been knocked down.

Dvorkovich said he sees no chance of the G20 accepting a new reserve currency next month, but his comments suggest the issue will be in the spotlight at the meeting, where world leaders will discuss ways to combat the global economic crisis.

"We could also think about more effective use of gold and gold and forex reserves in this system," Dvorkovich said, RIA reported. For its part, he added, Russia would support the broad use of the rouble and the yuan as reserve currencies, Itar-Tass reported. (Reporting by Simon Shuster; editing by Sue Thomas)

http://www.reuters.com/article/marketsNews/idAFLS37648120090328?rpc=44

Mortgage Delinquencies Jump 50 Percent

NEW YORK -- More U.S. consumers are filing for personal bankruptcy or relying on credit cards as the recession deepens and unemployment rises, a top credit bureau executive told Reuters on Thursday.


Dann Adams, president of U.S. Information Systems for Equifax Inc, reported a 37 percent rise in Chapter 7 bankruptcy filings. Under Chapter 7, assets are liquidated for those unable to pay their debts.


Also, Equifax reported a 50 percent increase in the number of homeowners who fell at least a month behind on mortgage payments in January, compared with last year.


Mortgage delinquencies foreshadow a rise in future foreclosures, short sales and home price declines as banks repossess homes and sell them at deep discounts.


Over the next six to eight months, the mortgage delinquency rate will reveal whether the government's plans to put a floor under housing prices is succeeding, Adams said.


"If the government can stabilize that number, it will mean at least things are not getting worse," he said.


According to Equifax, the number of consumers who missed payments on bank-issued cards rose 29.5 percent, with 4.17 of cardholders at least 60 days late on payments in January.


Those 60 days behind on auto loans from carmakers rose 18.8 percent, with 1.9 percent 60 days behind in January.


In the latest data from the U.S. Commerce Department on Thursday, new U.S. orders for long-lasting manufactured goods fell for a sixth consecutive month to a six-year low in January, indicating fewer workers are needed in the sector.


Also, the number of U.S. workers remaining on the jobless benefits roll after drawing an initial week of assistance jumped to a record high of 5.11 million in mid-February, the Labor Department said Thursday.


In response to the worsening credit data, lenders are ramping up how frequently they monitor borrowers' credit profiles, said Adams, whose clients include banks and other lenders trying to avoid more bad debt on their balance sheets.


"Those who were monitoring once a month have moved to weekly. Those who monitored weekly are moving to daily," Adams said.


Lenders are also spending more money on collections and less on getting new customers, Adams said, and are culling inactive cards and tightening lending standards on inactive cards.


The number of open bank-issued credit cards fell by 30 million since the July 2008 peak to 408 million in January. Credit limits fell to $3.3 trillion in January from a July 2008 peak of $3.59 trillion.


"It's all hands on deck around collections and loss mitigation," he said. "Everything's moved from acquisition to managing the portfolio."








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