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Margin Debt Backs Off of Recent Highs - Still at Elevated Level

We publish NYSE Margin Debt every month when it’s released.  This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-run mean).  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.  In May, margin debt decreased $5.3B to $315B.  On a standard deviation basis, margin debt fell to 1.36 standard deviations above the long-run average.

One limitation of this series is that it is reported on a lag.  The chart shows data through May.

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - margin debt

This week's notable callouts include widening spreads in MS, AXP, and municipal bonds.

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 0 of 11 improved / 6 out of 11 worsened / 5 of 11 unchanged
  • Intermediate-term (MoM): Negative / 0 of 11 improved / 9 of 11 worsened / 2 of 11 unchanged
  • Long-term (150 DMA): Neutral / 1 of 11 improved / 6 of 11 worsened / 4 of 11 unchanged

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - summary

1. US Financials CDS Monitor – Swaps widened across domestic financials last week, tightening for only 1 of the 28 reference entities and widening for 27.

Widened the most vs last week: MS, AXP, ALL

Tightened the most vs last week/widened the least: PMI, RDN, AGO

Widened the most vs last month: WFC, PMI, MTG

Widened the least vs last month: GS, AON, MMC

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - US CDS

2. European Financials CDS Monitor – Banks swaps in Europe were wider last week.  35 of the 39 swaps were wider and only 4 tightened.   

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - Euro cds

3. European Sovereign CDS – European sovereign swaps continue to move higher.  Notably, Ireland and Portugal swaps are now at the level that Greek swaps were just a few months ago, with both countries in the high 800s. 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - sov cds

4. High Yield (YTM) Monitor – High Yield rates edged lower last week, ending at 7.57 versus 7.62 the prior week.

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - high yield

5. Leveraged Loan Index Monitor – The Leveraged Loan Index continued to slide, moving to its lowest level since mid-March, closing at 1598 versus 1602 the prior week.   

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - lev loan

6. TED Spread Monitor – The TED spread rose 2 bps to its highest level since early May, ending the week at 24.1 versus 22.1 the prior week.

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - ted spread

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell 4 points, dropping to 8.4. 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - JOC

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields remained close to flat, ending the week at 1678.

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - greek bonds

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 rose 7 bps to 122. 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - mcdx

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 remained flat versus the prior week.

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - baltic dry

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened slightly to 254 bps.   

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - 2 10

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  3.3% upside to TRADE resistance, 1.0% downside to TRADE support.

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - XLF

Joshua Steiner, CFA

Allison Kaptur