Treasury bills traded this week again at negative yields. By week's end, one-month Treasury bill rates were at .01% and three-month yields at .015%. Two-year government yields fell 13 bps to 0.68%. Five-year T-note yields declined 4 bps this week to 1.52%. Ten-year yields fell 3 bps to 2.68%, and long-bond yields declined 4 bps to 3.15%. The implied yield on 3-month December '09 Eurodollars sank 18 bps to 1.845%. Benchmark Fannie MBS yields sank 60 bps to 4.13%. The spread between benchmark MBS and 10-year T-notes narrowed 56 to 146 bps. Agency 10-yr debt spreads narrowed 33 to 62 bps (2-wk drop of 55 bps). The 2-year dollar swap spread declined 17.5 to 105.25 bps, the 10-year dollar swap spread declined 12.25 to 19 bps, and the 30-year swap spread declined 2.75 to negative 33 bps. Corporate bond spreads were mixed. An index of investment grade bond spreads narrowed 13 to 203 bps, and an index of junk bond spreads widened 32 to 1,222 bps.

Investment-grade debt issuance included GE Capital $6.2bn, Regions Bank $2.5bn, HSBC $2.7bn, Suntrust $2.75bn, Morgan Stanley $2.5bn, JPMorgan Chase $2.3bn, Bank of America $1.5bn, Dupont $1.0bn, Keycorp $250 million, Key Bank $1.0bn, Goldman Sachs $775 million, Cox Coomunications $600 million, FPL Capital $450 million, and Monongahela Power $300 million, and Wisconsin Electric Power $250 million.

I saw no junk or convert issuance this week.

International debt issues included Royal Bank of Scotland $3.0bn, Shell International $2.75bn, Macquarie Group $1.7bn, ANZ Bank $1.75bn, and Westpac Banking $1.5bn.

German 10-year bund yields jumped 27 bps to 3.29%. The German DAX equities index rallied 6.4% (down 42.2% y-t-d). Japanese 10-year "JGB" yields added 2 bps to 1.385%. The Nikkei 225 gained 4.0% (down 46.2% y-t-d). Emerging markets were generally stronger. Brazil's benchmark dollar bond yields sank 46 bps to 7.25% (2-wk drop 95bps). Brazil's Bovespa equities index jumped 10% (down 39.2% y-t-d). The Mexican Bolsa rose 7.5% (down 27.5% y-t-d). Mexico's 10-year $ yields fell 44 bps to 6.58% (2-wk decline 132bps). Russia's RTS equities index rallied 10.6% (down 71.5% y-t-d). India's Sensex equities index recovered 5.0%, reducing y-t-d losses down to 52.2%. China's Shanghai Exchange declined 3.2%, boosting y-t-d losses to 62.9%.

Freddie Mac 30-year fixed mortgage rates declined 6 bps to 5.47% (down 64bps y-o-y). Fifteen-year fixed rates sank 13 bps to 5.20% (down 58bps y-o-y). One-year ARMs declined 7 bps to 5.09% (down 41bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates at 7.05% (up 37bps y-o-y).

Bank Credit surged $75.7bn to $9.980 TN (week of 12/3). Bank Credit has expanded $767bn y-t-d, or 8.8% annualized. Bank Credit has expanded $588bn over the past 13 weeks. For the week, Securities Credit jumped $83.1bn. Loans & Leases declined $7.4bn to $7.176 TN (52-wk gain of $425bn, or 6.3%). C&I loans dropped $10.2bn, reducing y-t-d growth to 10.7%. Real Estate loans increased $3.2bn (up 5.8% y-t-d). Consumer loans added $1.8bn, while Securities loans fell $9.8bn. Other loans gained $7.6bn.

M2 (narrow) "money" supply jumped $37bn to a record $7.986 TN (week of 12/1). Narrow "money" has expanded $523bn y-t-d, or 7.6% annualized. For the week, Currency gained $3.6bn, and Demand & Checkable Deposits increased $4.0bn. Savings Deposits rose $14.3bn, and Small Denominated Deposits gained $6.9bn. Retail Money Funds rose $8.5bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $34.0bn to a record $3.777 TN, with a y-t-d expansion of $664bn, or 22.6% annualized.

Total Commercial Paper outstanding surged $48.6bn this week to an 11-week high $1.700 TN, with CP down $84.9bn y-t-d. Asset-backed CP gained $7.1bn, with 2008 posting a decline of $34.0bn. Over the past year, total CP has contracted $138bn, or 7.5%.

Federal Reserve Credit jumped $123.7bn to a record $2.241 TN, with a historic 13-wk increase of $1.353 Trillion. Fed Credit has expanded $1.368 TN y-t-d (163% annualized). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 12/10) declined $1.0bn to $2.494 TN. "Custody holdings" were up $437bn y-t-d, or 22% annualized.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - have dropped a notable $198bn over the past eight weeks. Over the past year reserves were up $657bn, or 10.8%, to $6.749 TN.

Global Credit Market Dislocation Watch:

December 11 - Bloomberg (Shobhana Chandra): "U.S. household wealth fell in the third quarter by the most on record as property values and stock prices tumbled... Net worth for households and non-profit groups decreased by $2.81 trillion... according to the Federal Reserve's Flow of Funds report... Real-estate-related assets declined by $646.9 billion, three times the prior quarter's drop... 'This is not pretty," said Michael Feroli, an economist at JPMorgan... 'It's going to take a long time to repair balance sheets that are being severely impaired...' Household net worth dropped to $56.5 trillion, the lowest level since the last three months of 2006, from $59.4 trillion in the second quarter. The decline over the 12 months ended in September, at 11%, is the biggest year-over-year drop since records began..."

December 11 - Bloomberg (Michael J. Moore): "The rally in Treasuries that pushed yields on bills below zero percent this week is adding to concerns that the $5.3 trillion market for government debt is a bubble waiting to burst. Investors seeking safety from losses in equity and credit markets charged the Treasury zero percent interest when the government sold $30 billion of four-week bills on Dec. 9. A day later three-month bill rates turned negative for the first time since the U.S. began selling the debt in 1929. Yields on two-, 10- and 30-year securities touched record lows this month."

December 10 - Bloomberg (Gonzalo Vina and Robert Hutton): "U.K. Chancellor of the Exchequer Alistair Darling is considering credit guarantees for households and companies to spur bank lending... Darling is looking at a range of options to revive credit including whether to expand a 250 billion pound ($370 billion) Treasury program to support bank debt so that it covers mortgages and other loans..."

December 10 - Wall Street Journal (Jon Hilsenrath and Damian Paletta): "The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets. Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools... One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency. Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up."

December 9 - Bloomberg (Ambereen Choudhury and Jonathan Keehner): "Forced sales demanded by creditors and government-brokered transactions may provide the only consolation for bankers in what promises to be the slowest year for mergers and acquisitions since 2004. Bankers at Barclays Capital and Nomura Holdings Inc. say the value of deals may decline 30% in 2009 to about $2 trillion. Takeovers so far this year are down 36% from the same period in 2007..."

Currency Watch:

December 11 - Bloomberg (James M. Gomez): "Sebastian Socaciu, a 29-year-old Romanian, decided his country should adopt the euro when he had to choose between buying a new coat or paying the mortgage. With his house payments in euros and his salary in lei, the Romanian currency's slump forced Socaciu to forego the coat he needs to brave the frigid winter building cell-phone towers. 'I'm totally for euro adoption; it would really spare me,' Socaciu said...Eastern Europeans are pushing to join the 15-nation euro club sooner than planned to shield the former communist nations from the global financial crisis."

December 12 - Bloomberg (Emma O'Brien): "Russia's ruble headed for its biggest weekly decline against the euro since 2000 after the central bank eased its defense of the currency for the fifth time in a month... The ruble dropped 3.3% this week to 37.0395 per euro..."

The dollar index sank 4.0% to 83.64. For the week on the upside, the South Korean won increased 7.5%, the Danish krone 5.2%, the Euro 5.1%, the Norwegian krone 4.2%, the Swiss franc 3.7%, the Swedish krona 3.5%, the Australian dollar 2.8%, and the New Zealand dollar 2.7%. On the downside, the Mexican peso declined 0.3%.

Commodities Watch:

December 10 - Bloomberg (Rebecca Keenan and Brett Foley): "Rio Tinto Group, the world's third- largest mining company, will eliminate 14,000 jobs, cut capital spending by more than half and sell 'significant assets' as demand for metals sinks in the global recession."

Gold jumped 8.7% to $822.40, and Silver gained 8.5% to $10.23. January Crude rose $5.47 to $46.28. January Gasoline surged 19.6% (down 57% y-t-d), while January Natural Gas dropped 4.4% (down 26.7% y-t-d). March Copper increased 4%. March Wheat rallied 7.9% and Corn 20.8%. The CRB index rallied 8.8% (down 36.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) gained only 1.1% (down 41.6% y-t-d).

China Watch:

December 12 - Bloomberg (Li Yanping and Lee Spears): "China's economic slowdown is deepening, with overcapacity in almost all industries, and won't bottom out until after the first quarter of next year, two senior officials said today. 'The international financial crisis is having a severe domestic impact,' Li Yizhong, head of the Ministry of Industry and Information Technology, said... 'We don't think we've bottomed out yet, and the impact will broaden further in December.'"

December 11 - Bloomberg (John Liu): "Dai Chen broods as train No. 1076 rumbles across south China's Guangdong province, taking him back to the fields and trees of his rural home. He'd rather be on the noisy, cramped factory floor in Dongguan where he used to work. 'There's nothing to do in the countryside except be a farmer," Dai, 21, says... "I don't want to be a farmer.' As many as 20 million migrants may leave coastal cities next year as the worst financial crisis since the Great Depression shutters factories... Until now migration has been a safety valve for China, with the population of rural areas dropping by 140 million since 1999. As workers return to the countryside, where wages are a third of those in the cities, there is growing concern among China's leaders that rising tensions could undermine the Communist Party..."

December 10 - Bloomberg (Kevin Hamlin and Li Yanping): "China's exports fell for the first time in seven years... Exports declined 2.2% in November from a year earlier... Imports plunged 17.9%, pushing the trade surplus to a record $40.09 billion. China's leaders pledged 'more forceful measures' to help small companies and create jobs in statements within hours of the trade report."

December 11 - Bloomberg (Wang Ying): "China's power production slumped 7.1% last month, the biggest decline in more than seven years... That's the steepest drop since January 2001..."

Japan Watch:

December 12 - Bloomberg (Toru Fujioka): " Japan's consumers became the most pessimistic in at least 26 years, indicating their weaker spending may deepen the recession. The confidence index dropped to 28.4 last month from 29.4 in October...It's the lowest since the government began compiling the figures in 1982."

December 12 - Bloomberg (Kathleen Chu and Mariko Yasu): "The Japan Housing Finance Agency, with $429 billion in assets, said it needs a new business model after copying the failed practices of Fannie Mae and Freddie Mac."

India Watch:

December 12 - Bloomberg (Kartik Goyal): "India's industrial production unexpectedly fell for the first time in 15 years, putting pressure on policy makers to add to interest rate and tax cuts to shield the weakening economy from a global recession. Output at factories, utilities and mines dropped 0.4% in October from a year earlier..."

Latin America Watch:

December 9 - Bloomberg (Joshua Goodman): "Brazil's economy expanded more than expected in the third quarter, as investment and consumer spending remained resilient in the early days of the global economic crisis. Gross domestic product jumped 6.8% from the same period a year earlier..."

Unbalanced Global Economy Watch:

December 10 - Bloomberg (Brian Swint): "The U.K. economy may contract at the fastest pace since 1990 in the current quarter as the recession intensifies, the National Institute for Economic and Social Research said. Gross domestic product fell 1% in the three months through November and will probably plunge more than that in the last three months of the year..."

December 9 - Bloomberg (Mark Gilbert): "Investing in U.K. government debt is almost twice as risky as buying bonds sold by McDonald's Corp., based on prices in the credit-default swap market."

December 9 - Bloomberg (Brian Swint): "U.K. home sales declined to the lowest level since at least 1978 as Britain plunged deeper into a recession, the Royal Institution of Chartered Surveyors said."

December 9 - Bloomberg (Simon Packard): "Values of shops, offices and warehouses in the U.K. fell at a record pace in November, CB Richard Ellis Group Inc. said, as banks curbed their lending amid a recession. The estimated value of commercial buildings declined 6.6% from the previous month..."

December 12 - Bloomberg (Fergal O'Brien): "European industrial production plunged the most in 15 years in October as orders weakened and the region's biggest companies cut investment. Output fell 5.3% from a year earlier..."

December 12 - Bloomberg (Mark Deen and James G. Neuger): "European Union leaders trimmed a proposed stimulus package to halt the slide into a recession, as Germany warded off calls by France and Britain for deficit- boosting programs. EU leaders pledged economy-boosting steps worth 'about' 1.5% of gross domestic product... The figure is equal to 200 billion euros ($266 billion)."

December 12 - Bloomberg (Simon Kennedy): "French manufacturing confidence fell faster than forecast to a 21-year low in November, suggesting the economy will suffer a bigger contraction in the fourth quarter than previously anticipated, the Bank of France said."

Bursting Bubble Economy Watch:

December 11 - Bloomberg (Timothy R. Homan and Shobhana Chandra): "The number of Americans filing first- time claims for unemployment benefits surged more than forecast last week to a 26-year high... Initial jobless claims increased 58,000 to 573,000... the highest level since November 1982... The number of workers staying on benefit rolls reached 4.429 million, also the most since 1982."

December 11 - Bloomberg (Kevin Reynolds and David Mildenberg): "Bank of America Corp., the third- largest U.S. bank, said it plans to cut 30,000 to 35,000 positions over the next three years because of its acquisition of Merrill Lynch & Co. and the weak economic environment."

December 11 - Bloomberg (Bob Willis and Timothy R. Homan): "U.S. exports slid to a seven-month low... The export slump... spurred a widening in the trade deficit to $57.2 billion in October..."

December 10 - Bloomberg (Beth Jinks): "Las Vegas Strip casino gambling revenue declined for the 10th straight month in October... Gambling proceeds from the Strip fell 26% to $475 million from a year earlier, Nevada's Gaming Control Board said..."

December 10 - Bloomberg (Shobhana Chandra and Andy Burt): "The biggest slump in U.S. consumer spending since 1942 will extend the recession and push the jobless rate to the highest level in a quarter century, according to economists surveyed by Bloomberg News. Household spending will drop 1% in 2009, the biggest decline since after the attack on Pearl Harbor... By the middle of next year, the economy will have shrunk for a record four consecutive quarters, the survey showed."

December 8 - Bloomberg (Alex Nicholson): "Standard & Poor's Ratings Services lowered Russia's long-term sovereign credit rating to negative because of the 'rapid depletion' of the country's financial reserves. The rating was cut one level to BBB, the second-lowest investment grade, from BBB+..."

Central Banker Watch:

December 11 - Bloomberg (William Sim and Janet Ong): "South Korea and Taiwan cut interest rates today to shore up economies... The Bank of Korea reduced its key rate to a record low of 3% from 4%. Taiwan's central bank cut its benchmark by the most in 26 years to 2% from 2.75%."

GSE Watch:

December 10 - Bloomberg (Dawn Kopecki): "Fannie Mae and Freddie Mac... are considering waiving a requirement for new appraisals on refinanced loans, their regulator said."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

December 10 - Bloomberg (Neil Unmack and Oliver Suess): "Catastrophe bonds, unshaken by a decade of hurricanes and earthquakes, are buckling in this year's financial tsunami. The bonds promise investors as much as 10 percentage points more than benchmark interest rates unless insurers reclaim money to pay disaster claims. That happened only once before, and so- called cat bonds were posting annualized returns of as much as 8.3% as recently as August... All that changed with the Sept. 15 collapse of... Lehman... which sold contracts to protect returns on four cat bonds. Lehman's bankruptcy nullified the guarantees..."

Real Estate Bust Watch:

December 11 - Bloomberg (Dan Levy): "U.S. foreclosure filings climbed 28% in November from a year earlier and a brewing 'storm' of new defaults and job losses may force 1 million homeowners from their properties next year, RealtyTrac Inc. said. A total of 259,085 properties got a default notice, were warned of a pending auction or were foreclosed on last month... 'We're going to see a pretty significant storm next year,' Rick Sharga, executive vice president of marketing for... RealtyTrac, said..."

Speculator Watch:

December 12 - Bloomberg (Bradley Keoun, Josh Fineman and Katherine Burton): "Hedge funds, already heading for their worst year on record, may lose at least $10 billion from investing with a New York firm that founder Bernard L. Madoff called "a giant Ponzi scheme.' The biggest loser may be Walter Noel's Fairfield Greenwich Group, whose $7.3 billion Fairfield Sentry Ltd. invested with Madoff's eponymous firm... Another client was Kingate Management Ltd., whose $2.8 billion Kingate Global Fund Ltd. invested with Madoff... Investors, ranging from hedge funds that depend on outside managers to wealthy individuals, entrusted their money with the 70-year-old Madoff, who told employees before his arrest yesterday that his firm was 'one big lie' and may have cost clients as much as $50 billion. His confession comes with hedge fund assets poised to fall as low as $1.1 trillion by Jan. 1 from $1.9 trillion in June, reflecting market losses and customer redemptions, analysts at Morgan Stanley estimate. 'If the losses were $50 billion or even half that amount, it would be the biggest Ponzi scheme in history,' said Mark Schonfeld, the former head of the U.S. Securities and Exchange Commission's New York office..."

December 11 - Bloomberg (Tomoko Yamazaki): "The global hedge-fund industry lost $64 billion of assets in November, with an index tracking its performance declining for a sixth month...Eurekahedge Pte said. 'It's very clear that there is going to be significant consolidation in the hedge-fund industry,' said Duncan Smith, a partner in Hong Kong at Ogier... 'Conditions are quite difficult and that really goes without saying. Underlying liquidity is very hard for funds.'"

December 8 - Bloomberg (Bei Hu and Tomoko Yamazaki): "Citadel Investment Group LLC, the hedge fund manager founded by Kenneth Griffin, will close down its Tokyo office and Asian principal investments operations, cutting more than half of jobs in the region."

Muni Watch:

December 10 - Bloomberg (Jerry Hart): "Florida state senators were told to delay adjourning and work next week to tackle a $2 billion budget deficit projected to increase in 2009 as revenue from sales and real estate taxes slide. 'This is not simply another budget exercise,' Senate President James Atwater told a special briefing for lawmakers... 'There has been a tectonic shift in the structural underpinnings of our economy.'"

California Watch:

December 10 - Bloomberg (William Selway): "California's budget deficit has widened to $14.8 billion for the next seven months amid lawmaker disagreement on how to address the shortfall, Governor Arnold Schwarzenegger said. During a press conference in Sacramento, Schwarzenegger said the size of the gap grows by $28,000 every minute that the Legislature fails to act. The governor's office estimated last month that the state had an $11.2 billion deficit for the current fiscal year, which ends in June."

December 8 - Associated Press (Tomoko Yamazaki): "California's budget deficit will reach $41.8 billion over the next 18 months, a figure far worse than already abysmal previous estimates, Gov. Arnold Schwarzenegger's office said... An earlier projection by the Legislature's nonpartisan analyst had pegged the gap at $28 billion through June 2010... California is projected to run out of cash in February and may have to issue IOUs for its bills."

December 11 - Bloomberg (Joseph Galante and William Selway): "California may have its debt rating cut by S&P on more than $56 billion in bonds. S&P lowered its rating on some of the state's debt, the first downgrade for California in five years. S&P said it may lower the rating on California's $46.6 billion of general obligation debt and $7.8 billion in bonds backed by lease payments. It also reduced its rating on $5 billion of short-term debt to 'SP-2' from 'SP-1' that the state had sold to cover its tax shortfalls."

December 9 - Bloomberg (Michael B. Marois): "California will be unable to sell public works bonds and will have to halt financing of projects such as schools and roads if lawmakers fail to take immediate action to abate a widening deficit, the state's Treasurer said. As much as $5 billion of infrastructure spending scheduled this fiscal year may have to be suspended within two weeks... That's because the pooled money investment account, which he uses to park bond money until its needed, is about to run dry. He said he can't sell more bonds amid the credit crisis on Wall Street until lawmakers assure investors the state is solvent."

Crude Liquidity Watch:

December 11 - Bloomberg (Tim Barwell): "Abu Dhabi, armed with oil wealth and a $500 billion spending plan, is providing the escape route for British engineers as their bets on Dubai's construction boom turn sour. Dubai's focus on financial services, luxury homes and mass tourism attracted U.K. skyscraper designers and road-network planners... Abu Dhabi, where 1 million people sit atop 8% of the world's oil reserves, is pumping money into developing tourist attractions and manufacturing to break away from its dependence on crude..."

We're all Steeler fans now:

The Prudent Bear team has relocated to Pittsburgh and is now proudly part of Federated Investors, Inc. I'll travel back to Dallas this evening and bring my wife and baby back with me Sunday. I'm hoping to return to a more normal posting schedule soon. Thanks so much for your patience.