For the week, the S&P500 slipped 0.2% (up 2.8% y-t-d), and the Dow declined 0.3% (up 3.9%). The broader market continues to outperform. The S&P 400 Mid-Caps gained 1.0% (up 10.6%), and the small cap Russell 2000 jumped 1.2% (up 8.6%). The Morgan Stanley Cyclicals were unchanged (up 6.7%), and the Transports dipped 0.1% (up 10.0%). The Morgan Stanley Consumer index added 0.2% (up 5.3%), and the Utilities added 0.1% (up 1.6%). The Banks dipped 0.5% (up 0.4%), while the Broker/Dealers were little changed (down 9.3%). The Nasdaq100 retreated 1.3% (up 7.3%), and the Morgan Stanley High Tech index dipped 0.5% (up 1.0%). The Semiconductors rose 0.6% (down 3.3%). The InteractiveWeek Internet index declined 0.7% (up 18.3%). The Biotechs lost 0.8%, reducing 2010 gains to 23.0%. With bullion up another $23, the HUI gold index gained 1.9% (up 19.7%).

One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 16 bps. Two-year government yields declined 4 bps to 0.40%. Five-year T-note yields fell 6 bps to 1.26%. Ten-year yields declined 9 bps to 2.51%. Long bond yields dropped 8 bps to 3.72%. Benchmark Fannie MBS yields were 8 bps lower to 3.37%. The spread between 10-year Treasury yields and benchmark MBS yields widened one basis point to 86 bps. Agency 10-yr debt spreads narrowed 2 to 25 bps. The implied yield on December 2010 eurodollar futures was little changed at 0.37%. The 10-year dollar swap spread increased 4.25 to 7.75. The 30-year swap spread increased 2.25 to negative 34.25. Corporate bond spreads were mixed. An index of investment grade bond risk declined 3 to 104 bps. An index of junk bond risk increased 9 to 552 bps.

It was another decent week of debt issuance. Investment grade issuers included NBC Universal $5.1bn, JPMorgan Chase $1.15bn, Exelon Generation $900 million, Aviation Capital $600 million, Hyundai Capital America $500 million, New York Life $350 million, Airgas $250 million, Alabama Power $250 million, Entergy Gulf States $250 million, and Pepco $250 million.

Junk issuers included Nielsen $750 million, Healthsouth $525 million, Vertellus Specialties $345 million, Roadhouse Financing $355 million, Rotech Healthcare $230 million, and Omega Healthcare $225 million.

Converts issues included Level 3 Communications $201 million, Northgate Exploration $150 million and Newpark Resource $150 million.

The list of international dollar debt sales included BP Capital $3.5bn, Nordea Bank $2.75bn, Bank Nova Scotia $1.25bn, Santander $1.1bn, Royal Bank of Canada $1.0bn, Gold Fields $1.0bn, Sri Lanka $1.0bn, Kommunalbanken $1.0bn, Groupe BPCE $750 million, Korea Electric Power $700 million, Kazakhstan Temir $700 million, Banco do Brasil $660 million, Buenos Aires $550 million, Banco Del Estado $500 million, and Braskem $450 million.

U.K. 10-year gilt yields dropped 7 bps to 2.97%, and German bund yields fell 6 bps to 2.28%. Greek 10-year bond yields sank 91 bps to 10.13%, and 10-year Portuguese yields dropped 26 bps to 6.11%. Ireland yields fell 16 bps to 6.31%. The German DAX equities index declined 1.4% (up 4.3% y-t-d). Japanese 10-year "JGB" yields declined 2 bps to 0.95%. The Nikkei 225 dipped 0.7% (down 10.8%). Emerging equity markets were higher. For the week, Brazil's Bovespa equities index surged 3.0% (up 2.4%), and Mexico's Bolsa gained 1.6% (up 5.3%). South Korea's Kospi gained 1.6% to a 2010 high (up 11.5%). India's Sensex equities index jumped 2.0% (up 17.1%) to a new 2010 high. China's Shanghai Exchange rallied 2.6% (down 19.0%). Brazil's benchmark dollar bond yields sank 22 bps to 3.67%, and Mexico's benchmark bond yields fell 14 bps to 3.74%.

Freddie Mac 30-year fixed mortgage rates were unchanged last week at 4.37% (down 57bps y-o-y). Fifteen-year fixed rates were unchanged at 3.82% (down 54bps y-o-y). One-year ARMs jumped 6 bps to 3.46% (down 103bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 3 bps to 5.30% (down 82bps y-o-y).

Federal Reserve Credit increased $1.2bn to $2.2 TN. Fed Credit was up $67.7bn y-t-d (4.1% annualized) and $167bn, or 7.9%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 9/29) surged $16.1bn (16-wk gain of $154bn) to a record $3.230 TN. "Custody holdings" have increased $274bn y-t-d (12.4% annualized), with a one-year rise of $375bn, or 13.1%.

M2 (narrow) "money" supply rose $7.9bn to $8.712 TN. Narrow "money" has increased $178bn y-t-d, or 2.9% annualized. Over the past year, M2 grew 2.8%. For the week, Currency increased $2.0bn, while Demand & Checkable Deposits declined $1.1bn. Savings Deposits rose $17.1bn, while Small Denominated Deposits fell $6.3bn. Retail Money Fund assets declined $3.8bn.

Total Money Market Fund assets (from Invest Co Inst) gained $1.8 bn to $2.805 TN. In the first 39 weeks of the year, money fund assets dropped $488bn, with a one-year decline of $624bn, or 18.2%.

Total Commercial Paper outstanding jumped $27.2bn to $1.091 TN. CP has declined $79bn, or 9.0% annualized, year-to-date, and was down $141bn from a year ago.

International reserve assets (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.378 TN y-o-y, or 19.1%, to $8.589 TN.

Global Credit Market Watch:

October 1 - Bloomberg (Tim Catts): "Sales of corporate bonds in the U.S. decelerated this week as the busiest September on record ends... Corporate bond issuance fell for the second straight week... even as sales of $159 billion set a record for the month of September..."

October 1 - Bloomberg (Jason Webb): "Emerging-market borrowers are on course to sell more bonds than ever this year after yields hit record lows and developing economies rebounded faster from the credit crisis than advanced nations. Governments and companies in developing countries... borrowed $196 billion from July to September, the most for any quarter..."

September 29 - Bloomberg (Brett Foley and Jeffrey McCracken): "Dealmaking staged a comeback in the third quarter, with a jump in multibillion-dollar takeovers putting this year on pace to surpass 2009. The quarter was the busiest in two years, with $562.6 billion of announced transactions... With almost $3 trillion of cash in their coffers, companies drove a 59% increase in takeovers from a year ago... The jump in deals in the third quarter... brings total announced takeovers to $1.48 trillion in the first nine months of 2010, compared with $1.76 trillion in all of 2009."

September 28 - Bloomberg (Emre Peker): "Speculative-grade companies are borrowing to finance dividend payments to their private-equity owners at the fastest rate since before the credit crisis, taking advantage of investor demand for high relative yields. Banks arranged or started marketing $8.77 billion of high- risk, high-yield loans slated for shareholder payouts this quarter, bringing 2010's total to $17.1 billion, more than five times the amount of the past two years combined..."

September 30 - Bloomberg (Joe Brennan): "Ireland is preparing to take majority control of Allied Irish Banks Plc and pump extra cash into Anglo Irish Bank Corp., raising the cost of repairing the financial system to as much as 50 billion euros ($68 billion)."

September 30 - Bloomberg (Emma Ross-Thomas): "Spain's top credit rating was cut one level by Moody's... which cited a 'weak' economic outlook and doubts that the nation will reach deficit- reduction targets. The ratings company lowered Spain to Aa1 from Aaa with a stable outlook..."

September 27 - Bloomberg (Isabell Witt and Karen Eeuwens): "Private-equity firms are borrowing the most in Europe since the collapse of Lehman... Leveraged buyout loans surged to $8 billion in the third quarter, the most in any three-month period since September 2008... Strengthening global demand helped the region's economy expand 1% in the second quarter, the fastest pace in four years... The default rate for leveraged borrowers declined to 5% in August from 12.3% a year ago, and will fall to 2.7% by the end of this year, Moody's...said..."

October 1 - Bloomberg (Emre Peker and Krista Giovacco): "Investors are demanding the highest risk premiums to buy leveraged loans as companies borrow at the fastest pace since the beginning of the credit crisis... Banks arranged $249.6 billion of leveraged loans during the first nine months of this year, more than 2.5 times the 2009 amount and the most since 2007..."

September 29 - Bloomberg (Gabrielle Coppola and Veronica Espinosa): "Brazilian companies... are selling record amounts of perpetual bonds amid investor demand for securities that pay higher premiums than fixed-maturity debt."

Global Government Finance Bubble Watch:

September 29 - Bloomberg (Bryan Keogh and Sapna Maheshwari): "Corporate borrowers in the U.S. are squeezing investors as record-low interest rates and a lack of high-yielding alternatives force bondholders to accept the smallest premiums on new debt sales since March."

October 1 - Bloomberg (Chris Reiter, Tommaso Ebhardt and Andreas Cremer): "Bugatti, Volkswagen AG's supercar brand, and Fiat SpA's Ferrari have sold out of their most expensive models as demand for luxury vehicles roars back."

Currency Watch:

September 28 - Bloomberg (Shamim Adam and David Yong): "The U.S. dollar is 'one step nearer' to a crisis as debt levels in the world's largest economy increase, said Yu Yongding, a former adviser to China's central bank. Any appreciation of the dollar is 'really temporary' and a devaluation of the currency is inevitable as U.S. debt rises, Yu said... 'Such a huge amount of debt is terrible... The situation will be worsening day by day. I think we are one step nearer to a U.S.-dollar crisis.' Yu also said China is worried about the safety of its foreign-exchange reserves including those invested in U.S. Treasuries as the U.S. currency weakens..."

October 1 - Bloomberg (Yoshiaki Nohara and Ron Harui): "Japan sold 2.12 trillion yen ($25bn) in the month through Sept. 28... as the nation attempted to weaken its currency... The yen rose to a 15-year high against the dollar on Sept. 15..."

September 27 - Financial Times (Jonathan Wheatley and Peter Garnham): "An 'international currency war' has broken out, according to Guido Mantega, Brazil's finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness. Mr Mantega's comments... follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies. 'We're in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,' Mr Mantega said. By publicly asserting the existence of a 'currency war', Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies."

September 27 - Financial Times (Alan Beattie): "Everyone has been thinking it, but Guido Mantega, the Brazilian finance minister, has been one of the few policymakers publicly to admit it. His assertion that there is a currency war going on follows a recent escalation of competitive intervention in the foreign exchange markets, with heavyweight powers armed with serious weaponry getting involved."

September 27 - Bloomberg (Joao Oliveira and Iuri Dantas): "Brazilian Finance Minister Guido Mantega said the government will buy all 'excess dollars' in the market in a bid to curb the real's appreciation and reduce volatility. Mantega... said the country is considering new taxes on short-term, fixed-income investments... Brazil doesn't plan to tax long-term investments, he said. 'We're already buying a bigger volume of currency -- we'll keep buying,' Mantega told reporters... 'We'll buy any excess dollars in the market.'"

The dollar index slumped 1.6% to 78.088 (up 0.3% y-t-d). For the week on the upside, the Euro increased 2.2%, the South Korean won 2.2%, the Danish krone 2.2%, New Zealand dollar 1.4%, the Swedish krona 1.4%, the Australian dollar 1.4%, the Taiwanese dollar 1.3%, the South African rand 1.3%, the Brazilian real 1.3%, the Japanese yen 1.2%, the Norwegian krone 1.0%, the Swiss franc 1.0%, the Singapore dollar 0.7%, the Canadian dollar 0.4% and the Mexican peso 0.1%. For the week on the downside, the British pound dipped 0.1%.

Commodities Watch:

October 1 - Bloomberg (Claudia Carpenter and Glenys Sim): "Copper rose to a two-year high... after a report showed that manufacturing accelerated in China, the world's biggest consumer of the metal."

The CRB index gained 0.7% (up 0.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 3.1% (up 4.7% y-t-d). Spot Gold gained 1.8% to a record $1,319 (up 20.2% y-t-d). Silver surged 3.1% to $22.06 (up 31% y-t-d). November Crude jumped $5.09 to $81.58 (up 2.8% y-t-d). November Gasoline surged 7.5% (up 1.6% y-t-d), while November Natural Gas dropped 5.3% (down 32% y-t-d). December Copper added 2.0% (up 10% y-t-d). December Wheat sank 9.0% (up 21% y-t-d), and December Corn fell 10.7% (up 12% y-t-d).

China Watch:

October 1 - Bloomberg: "China's manufacturing expanded at the fastest pace in four months in September... The purchasing managers' index rose to 53.8 from 51.7 in August..."

September 28 - Bloomberg (Debra Mao): "King & Wood, the Beijing-based law firm that advised on the world's largest initial public offering, isn't like the City or Wall Street rivals it worked with on the deal, International Managing Partner Rupert Li said. 'We're kids. Light years behind,' Li said of his 17-year- old firm compared with others... Maybe not much longer, though."

Japan Watch:

September 27 - Bloomberg (Kyoko Shimodoi and Toru Fujioka): "Japan is considering a stimulus package of as much as 4.6 trillion yen ($54.6bn) that will be funded with existing revenue, a government official said as policy makers seek to shore up the nation's recovery..."

September 28 - Bloomberg (Keiko Ujikane and Jarrett Banks): "China's 'de facto' ban on exports to Japan of rare earths, a group of 17 metals used in weapons, hybrid vehicles and laptop computers, may have a 'big impact' on Japan's economy, Japanese Economy Minister Banri Kaieda said."

September 30 - Bloomberg (Makiko Kitamura): "Toyota Motor Corp.'s sales in China may overtake those in Europe for the first time this year."

October 1 - Bloomberg (Emre Peker and Krista Giovacco): "Japan's deflation moderated and the unemployment rate fell... Consumer prices excluding fresh food slid 1% in August from a year earlier after falling 1.1% in July... The jobless rate dropped to 5.1% from 5.2%..."

India Watch:

September 30 - Bloomberg (Tushar Dhara): "India's food inflation accelerated to almost a two-month high, increasing pressure on the central bank to raise interest rates. An index measuring wholesale prices... rose 16.44% in the week ended Sept. 18 from a year earlier..."

September 29 - Bloomberg (Rajhkumar K Shaaw and Paresh Jatakia): "Indian stocks attracted a record 834.7 billion rupees ($18.5bn) from foreign funds this year, driving a rally that made the nation's equities index the best performer among the world's 10 biggest markets."

Asia Bubble Watch:

October 1 - Bloomberg (William Sim and Eunkyung Seo): "South Korea's consumer prices increased more than projected, rising at the fastest pace in 17 months, bolstering the case for the central bank to raise borrowing costs. The consumer price index climbed 3.6% in September from a year earlier..."

October 1 - Bloomberg (Chinmei Sung and Yu-huay Sun): "Taiwan increased its benchmark interest rate for the second time this year and said it will try to prevent real-estate speculation... Central bank Governor Perng Fai-nan.. raised the rate by 0.125 percentage point to 1.5%.

Latin America Watch:

October 1 - Bloomberg (Joao Lima): "China Petrochemical Corp., the country's second-largest oil and gas producer, will invest $7.1 billion in Repsol YPF SA's Brazilian unit as the Spanish oil company raises funds to develop offshore projects."

September 28 - Bloomberg: "Mexico is expected to be added to the Citi World Government Bond Index on Oct. 1, a move that will spur inflows of $16 billion into the country, or the amount of foreign direct investment the nation gets in a typical year, RBC Capital Markets said."

September 28 - Bloomberg (Randy Woods): "Chilean industrial output rose 6.9% in August from a year earlier...

Unbalanced Global Economy Watch:

September 28 - Bloomberg (Jennifer Ryan): "The U.K. economy's fastest quarter of growth in nine years was fuelled by rebounding consumer spending and inventories and the biggest jump in government spending since 2008. Gross domestic product expanded 1.2% in the three months through June..."

September 28 - Bloomberg (Scott Hamilton): "A U.K. retail-sales index rose to its highest in more than six years in September and stores forecast further growth next month, the Confederation of British Industry said."

October 1 - Bloomberg (Simone Meier): "Growth in Europe's manufacturing industry slowed and unemployment held at a 12-year high... a gauge of manufacturing in the 16-nation euro region declined to 53.7 in September from 55.1 the previous month..."

September 30 - Bloomberg (Zoya Shilova): "Russia's international reserves rose $6.4 billion in the week to Sept. 24 to $487.7 billion..."

September 29 - Bloomberg (Jacob Greber): "The number of Australian millionaires rose by more than 30% last year, climbing above the level recorded before the financial crisis hit... Some 174,000 millionaires had a combined wealth of $519 billion, up from $380 billion in 2008..."

U.S. Bubble Economy Watch:

October 1 - Bloomberg (Kathleen M. Howley): "U.S. courts are clogged with a record number of foreclosures. Next, they may be jammed with suits contesting property rights as procedural mistakes in those cases cloud titles establishing ownership. 'Defective documentation has created millions of blighted titles that will plague the nation for the next decade,' said Richard Kessler, an attorney in Sarasota, Florida..."

September 28 - Bloomberg (Alexandra Harris): "U.S. median household income fell 3% in 2009 to $50,221, the second straight annual drop, the Census Bureau said. Maryland had the highest income for a fourth consecutive year, at $69,272..."

October 1 - Bloomberg (Ryan J. Donmoyer): "After the economy slipped into recession in 2008, millions of Americans received unemployment benefits to make ends meet -- including almost 3,000 millionaires."

Real Estate Watch:

September 30 - Bloomberg (Dan Levy): "Homes in the foreclosure process sold at an average 26% discount in the second quarter as almost one-fourth of all U.S. transactions involved properties in some stage of mortgage distress, according to RealtyTrac Inc."

October 1 - Bloomberg (Oshrat Carmiel and Danielle Kucera): "Manhattan apartment sales jumped 19% in the third quarter from a year earlier, reaching the second-highest level since 2008... The median price of co-ops and condos that changed hands increased 7.5% to $914,000 as buyers sought larger units."

Central Bank Watch:

October 1 - New York Times (Sewell Chan): "The president of the Federal Reserve Bank of New York... all but called for the Fed to resume large-scale purchases of long-term government bonds, solidifying a growing conviction on Wall Street that the central bank will do just that, starting in November. 'Viewed through the lens of the Federal Reserve's dual mandate -- the pursuit of the highest level of employment consistent with price stability, the current situation is wholly unsatisfactory,' the president, William C. Dudley, said in a speech to the Society of American Business Editors and Writers.."

September 30 - Bloomberg (Craig Torres and Scott Lanman): "Federal Reserve officials are publicly disagreeing over the benefits of pursuing new monetary stimulus in a sign that Chairman Ben S. Bernanke hasn't secured a consensus on whether to buy more Treasuries. Policy makers have the tools to act and should respond 'vigorously, creatively, thoughtfully and persistently' to a slow recovery, Boston Fed President Eric Rosengren said... Separately, Philadelphia Fed President Charles Plosser said in New Jersey that the central bank risks its credibility by taking actions, such as additional securities purchases, that may fail to help the labor market."

September 27 - Bloomberg (Agnes Lovasz): "East European central bankers who have begun calling for higher interest rates probably won't persuade their colleagues until next year as the global economic recovery stalls and inflation remains in check... 'They've been reading old-school economics that if you keep rates low you create bubbles,' said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. 'But we are not in a situation where we are entering a boom. We are still in a bust.'"

California Watch:

October 1 - Bloomberg (Michael B. Marois): "California's longest budget impasse entered its fourth month today as Governor Arnold Schwarzenegger and top lawmakers wrestled over pensions and corporate taxes to close a $19.1 billion deficit."

September 27 - Bloomberg (Michael B. Marois and Brendan A. McGrail): "California officials are lining up a short-term loan of more than $5 billion from a group of Wall Street banks to give the state enough cash amid its longest-ever budget impasse, the state's treasurer said."

Speculator Watch:

September 29 - Bloomberg (Katherine Burton and Saijel Kishan): "D.E. Shaw & Co., the... hedge-fund firm that lost investors after limiting withdrawals in 2008, fired about 150 employees... The dismissals represent about 10% of the workforce..."