Margin Debt Approaching Prior Pre-Crash Highs
Today we are introducing the NYSE Margin Debt level as a component of the Risk Monitor. This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (in millions). As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market. Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous. Currently, we are very close to that level.
One limitation of this series is that it is reported on a lag. The chart shows data through March. We will update this analysis monthly when the new data is released.
This week's notable callouts include Greek bond yields making another new high and mortgage insurer swaps widening.
Financial Risk Monitor Summary (Across 3 Durations):
- Short-term (WoW): Negative / 2 of 11 improved / 4 out of 11 worsened / 5 of 11 unchanged
- Intermediate-term (MoM): Negative / 2 of 11 improved / 3 of 11 worsened / 6 of 11 unchanged
- Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged
1. US Financials CDS Monitor – Swaps mostly widened across domestic financials, widening for 18 of the 28 reference entities and tightening for 10.
Widened the most vs last week: PMI, MTG, RDN
Tightened the most vs last week: ACE, CB, GNW
Widened the most vs last month: GS, PMI, MTG
Tightened the most vs last month: ACE, ALL, GNW
2. European Financials CDS Monitor – Banks swaps in Europe widened last week. 36 of the 38 swaps were wider and only two tightened.
3. European Sovereign CDS – European sovereign swaps rose last week, climbing 24 bps on average. Greek CDS led the way higher, rising 141 bps or 11.1%.
4. High Yield (YTM) Monitor – High Yield rates remained flat last week, ending at 7.12 versus 7.14 the prior week. A data error or methodology change appears to be the cause of the step function in the Bloomberg series. We are awaiting clarification on this shift.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index ticked down very slightly after several weeks of treading water, ending the week at 1618 versus 1621 the prior week.
6. TED Spread Monitor – The TED spread continued to decline off its high last week, ending the week at 21.7 versus 24.0 the prior week.
7. Journal of Commerce Commodity Price Index – Last week, the JOC index bounced along the bottom, gaining 1.9 points versus the prior week.
8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds. Last week yields rose 113 bps versus the prior Friday.
9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads were flat at 104 vs 105 the prior week.
10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Early in the year, Australian floods and oversupply pressured the Index, driving it down 30% before bouncing off the lows. Last week the series reversed its decline mid-week, rising 43 points by Friday.
11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins. Last week the 2-10 spread tightened 1 bp to 263 bps.
12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 1.2% upside to TRADE resistance, 0.6% downside to TRADE support.
Joshua Steiner, CFA