For the week, the S&P500 was unchanged (up 6.1% y-t-d), while the Dow slipped 0.1% (up 6.6%). The S&P 400 Mid-Caps increased 0.5% (up 14.1%), while the small cap Russell 2000 was unchanged (up 12.5%). The Banks declined 1.1% (up 6.5%), while the Broker/Dealers added 0.6% (down 4.9%). The Morgan Stanley Cyclicals dipped 0.4% (up 11.8%), while the Transports were unchanged (up 16.0%). The Morgan Stanley Consumer index declined 0.5% (up 7.9%), and the Utilities fell 0.6% (up 2.0%). The Nasdaq100 gained 1.0% (up 14.2%), and the Morgan Stanley High Tech index jumped 1.6% (up 8.6%). The Semiconductors surged 4.4% (up 3.5%). The InteractiveWeek Internet index rose 3.2% (up 29.2%). The Biotechs gained 1.4%, boosting 2010 gains to 23.7%. With bullion jumping $30, the HUI gold index rallied 4.4% (up 21.5%).

One-month Treasury bill rates ended the week at 13 bps and three-month bills closed at 11 bps. Two-year government yields declined 2 bps to 0.33%. While volatile, five-year T-note yields ended the week down one basis point to 1.11%. Ten-year yields rose 4 bps to 2.60%. Long bond yields rose 5 bps to 3.97%. Benchmark Fannie MBS yields were up 3 bps to 3.36%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed one basis point to 76 bps. Agency 10-yr debt spreads narrowed 4 to 10.5 bps. The implied yield on December 2011 eurodollar futures declined 4.5 bps to 0.535%. The 10-year dollar swap spread increased 1.5 bps to 8.25. The 30-year swap spread increased 2.75 to negative 35. Corporate bond spreads narrowed. An index of investment grade bond risk declined 2 to 94 bps. An index of junk bond risk declined 11 to 488 bps.

October 28 - Bloomberg (Brendan A. McGrail and Alexandra Harris): "State and local debt sales swelled to an 18-month peak of $13.8 billion, overwhelming investor demand and sending municipal bond yields to the highest level in more than two months."

Investment grade issuers included U.S. Bank $1.5bn, Morgan Stanley $1.5bn, Georgia-Pacific $1.25bn, Travelers $1.25bn, Broadcom $700 million, National Rural Utility Coop $650 million, Sonoco $350 million, Kilroy Realty $325 million, and Sigma-Aldrich $300 million.

Junk bond funds attracted inflows of $ million (from Lipper), the eighth straight week of positive flows. Junk issuers included FMG Resources $2.0bn, Momentive Performance $635 million, Huntsman Intl $530 million, MGM Resorts $500 million, Boyd Gaming $500 million, Hexion $440 million, Jabil Circuit $400 million, Carrizo Oil & Gas $400 million, Rent-A-Center $300 million, M/I Homes $200 million, and Berry Petroleum $200 million.

Converts issues included Digital River $345 million.

The list of international dollar debt sales included Petroleos de Venezuela $3.0bn, BNP Paribas $2.0bn, Rio Tinto $2.0bn, Codelco $1.0bn, Alrosa $1.0bn, Axis Bank $500 million, Korea Gas $500 million, Hidili Industry $400 million, United Business Media $350 million, and Banco Bonsucesso $200 million.

U.K. 10-year gilt yields jumped 13 bps to 3.08%, and while German bund yields gained 4 bps to 2.52%. Greek 10-year bond yields surged 120 bps to 10.56%. Ten-year Portuguese yields rose 9 bps to 5.93%. Ireland yields jumped 40 bps to 6.92%. The German DAX equities index was little changed (up 10.8% y-t-d). Japanese 10-year "JGB" yields rose 4 bps to 0.93%. The Nikkei 225 dropped 2.4% (down 12.7%). Emerging equity markets were mixed. For the week, Brazil's Bovespa equities index gained 1.6% (up 3.0%), and Mexico's Bolsa rose 1.3% (up 10.7%). South Korea's Kospi index slipped 0.8% (up 11.9%). India's Sensex equities index declined 0.7% (up 14.7%). China's Shanghai Exchange added 0.1% (down 9.1%). Brazil's benchmark dollar bond yields declined 6 bps to 3.59%,and Mexico's benchmark bond yields sank 29 bps to 3.54%.

Freddie Mac 30-year fixed mortgage rates added 2 bps last week to 4.23%, but were down 80 bps year-over-year. Fifteen-year fixed rates increased 2 bps to 3.66% (down 80bps y-o-y). One-year ARMs were unchanged at 3.30% (down 127bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 6 bps to 5.18% (down 86bps y-o-y).

Federal Reserve Credit dipped $1.0bn to $2.283 TN. Fed Credit was up $62.8bn y-t-d (3.4% annualized) and $128bn, or 6.0%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 10/27) jumped $12.9bn (20-wk gain of $218bn) to a record $3.294 TN. "Custody holdings" have increased $339bn y-t-d (13.9% annualized), with a one-year rise of $395bn, or 13.6%.

M2 (narrow) "money" supply expanded $13.0bn to $8.773 TN. Narrow "money" has increased $240bn y-t-d, or 3.5% annualized. Over the past year, M2 grew 3.3%. For the week, Currency increased $2.7bn, while Demand & Checkable Deposits fell $11.5bn. Savings Deposits jumped $31.3bn, while Small Denominated Depositsdeclined $5.5bn. Retail Money Fund assets decreased $3.9bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $24.6bn to $2.807 TN. Year-do-date, money fund assets have dropped $487bn, with a one-year decline of $563bn, or 16.7%.

Total Commercial Paper outstanding jumped $22.8bn (6-wk gain of $132bn) to $1.168 TN, the high since the first week of 2010. CP has declined $2.2bn year-to-date, and was down $209bn from a year ago.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.547 TN y-o-y, or 20.9%, to a record $8.954 TN.

Global Credit Market Watch:

October 26 - Bloomberg (Bryan Keogh): "The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve-induced rally in high-risk assets, adding to concern fixed- income securities are overvalued... Record-low interest rates in the U.S. and Europe, and speculation the Fed will purchase more bonds to keep the economy from faltering, are encouraging debt investors to take on riskier securities and stoking concern prices are rising to unsustainable levels."

Global Government Finance Bubble Watch:

October 27 - Bloomberg: "The U.S. Federal Reserve's 'uncontrolled' issuance of dollars is adding to inflation risks in China and creating difficulties for the nation's businesses, Chinese Commerce Minister Chen Deming said. U.S. policies 'and continued increases in commodity prices are bringing China the shock of imported inflation,' the state- run Xinhua News Agency cited Chen... He referred to 'uncertainties' and 'difficulties' for Chinese firms."

October 28 - Bloomberg (Rebecca Christie and Craig Torres): "The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth... With their benchmark interest rate near zero, policy makers meet Nov. 2-3 to consider steps to boost an economy that's growing too slowly to reduce unemployment near a 26-year high. Financial-market participants are focusing on the size, timing and maturities of likely purchases aimed at lowering long-term rates, with estimates reaching $1 trillion or more."

October 25 - Bloomberg (Candice Zachariahs): "The Federal Reserve may purchase $2 trillion of assets to stimulate the U.S. economy and start by announcing a fresh round of monetary easing on Nov. 3, Goldman Sachs Group Inc. said. 'We expect an announcement of $500 billion or perhaps slightly more over a period of about six months,' Jan Hatzius, the... chief U.S. economist at Goldman Sachs, said... 'The key question, however, is not the size of the first step, but how far Fed officials will ultimately need to move to achieve their dual mandate of low inflation and maximum sustainable employment.'"

Currency Watch:

October 27 - Bloomberg (Simon Kennedy): "Finance chiefs from South Korea to South Africa signaled they may act to slow gains in their currencies, just four days after the Group of 20 vowed to soothe trade tensions... The shifts suggest G-20 members will keep trying to defend their economies from the slide of the dollar and capital inflows even after the group promised Oct. 23 to refrain from 'competitive devaluation' and to increasingly embrace market- determined currencies."

October 26 - Bloomberg (Shelley Smith): "Hong Kong is likely to ditch its currency peg to the U.S. dollar within two years in favor of a link to the yuan, according to Peter Redward, head of Emerging Asia research at Barclays Plc. 'It could happen quite quickly given the very rapid rise in the circulation of the currency here,' he said..."

The dollar index declined 0.4% (down 0.9% y-t-d) to 77.14. For the week on the upside, the New Zealand dollar increased 2.6%, the British pound 2.3%, the Japanese yen 1.2%, the Canadian dollar 0.6%, the Taiwanese dollar 0.6%, the Brazilian real 0.4%, the Singapore dollar 0.2%, the Australian dollar 0.1%. On the downside, the Norwegian krone declined 0.9%, the South African rand 0.9%, the Swedish krona 0.7%, the Swiss franc 0.5%, the South Korean won 0.2%, and the euro 0.1%.

Commodities Watch:

October 26 - Bloomberg (Brian Parkin and Tony Czuczka): "China's decision to curb exports of rare earths is set to spark a global race for alternative sources that may still take a decade to secure sufficient supplies, the head of the German commodities agency said... 'We're faced with a gap in rare-earth supplies that cannot be plugged overnight,' Steinbach said... 'Realistically, bringing rare earths in volume to markets from new sites like Mongolia, Africa and Greenland may take five to 10 years.'"

October 27 - Bloomberg (Supunnabul Suwannakij and Luzi Ann Javier): "Rice prices are likely to extend a rally as flooding... across Southeast Asia ravages crops in Thailand and Vietnam, the world's two biggest exporters. 'Rice production will become an issue next year,' Prasert Gosalvitra, head of Thailand's state-run Rice Department, said... 'Supply will become tight, driving prices higher.' ...The staple food for half the world will likely surge to a 10-month high as weather damage to crops in Pakistan and Thailand, which represent a combined 43% of global exports, threatens global supplies. The grain has jumped 57% from this year's low...on June 30."

October 27 - Bloomberg (Supunnabul Suwannakij): "A natural rubber supply shortage will likely 'worsen' in the fourth quarter as unseasonal rainfall continues to disrupt production from key growers, the Association of Natural Rubber Producing Countries said. Tightening supply emerged at a time when stockpiles of China, the world's largest buyer of natural rubber, were 73% lower than this year's high... The commodity used to make tires and gloves surged 22% this year..."

The volatile CRB index gained 1.2% (up 6.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) added 0.6% (up 7.5% y-t-d). Spot Gold rallied 2.3% to $1,359 (up 23.8% y-t-d). Silver surged 7.0% to $24.745 (up 52% y-t-d). December Crude declined 28 cents to $81.41 (up 3% y-t-d). December Gasoline added 0.4% (up 1% y-t-d), and December Natural Gas jumped 10.1% (down 27% y-t-d). December Copper fell 1.4% (up 12% y-t-d). December Wheat jumped 6.9% (up 33% y-t-d), and December Corn rose 3.9% (up 40% y-t-d).

China Bubble Watch:

October 27 - Bloomberg: "China aims to stabilize food costs and rein in excessive property-price gains in some cities as the economy maintains momentum, the cabinet said... The government will ensure adequate grain production and crack down on commodity hoarding... Local authorities must 'seriously' implement property curbs and build more low-cost homes, it said."

October 26 - Bloomberg: "China's new loans to the real estate sector rose 32.9% in the first nine months from a year ago to 1.72 trillion yuan, the People's Bank of China said..."

October 27 - Bloomberg (Kelvin Wong): "Hong Kong luxury home prices have exceeded the previous peak of 1997, fueling speculation the government may introduce further steps to prevent the housing bubble from bursting. Prices of apartments with an area of at least 100 square meters (1,076 square feet) are 13.8% higher than in the third quarter of 1997... Measures introduced by the government this year, including higher mortgage down payments and increased land supply, failed to stem an almost 50% surge in home prices since early 2009."

Japan Watch:

October 28 - Bloomberg (Mayumi Otsuma): "The Bank of Japan brought forward the date of its next policy meeting, a move to accelerate stimulus for a slowing economy that prompted a jump in Japanese bond prices on speculation of further easing steps. The BOJ also said it will buy corporate debt with lower credit ratings than it previously purchased..."

Asia Bubble Watch:

October 27 - Bloomberg (Eunkyung Seo and Frances Yoon): "Bank of Korea Governor Kim Choong Soo said the nation may consider imposing capital controls to slow fund inflows that have driven up the won.... Capital controls can be a 'useful part of the policy toolkit' though they create 'distortions and costs,' Kim said..."

October 28 - Bloomberg (Michael Tsang and Lee Spears): "Record demand for initial public offerings in Asia is reducing the share of U.S. IPOs to an all- time low as companies from China to Malaysia and India flood the market with more equity than ever. Jiangsu Rongsheng Heavy Industry Group Co., Petronas Chemicals Group Bhd. and QR National Ltd. are preparing to sell more than $10 billion of shares... adding to the $134 billion raised in 2010... Hong Kong's AIA Group Ltd. and Coal India Ltd. raised almost the same amount this month as all U.S. deals this year as the share of American IPOs dwindled to 11 percent. Investors are paying 24 times next year's profits, twice the average for U.S. equities, because revenues for newly listed Asian companies are forecast to increase five times as much..."

Latin America Watch:

October 28 - Bloomberg (Matthew Bristow): "Brazil's broadest measure of inflation rose 1.01% in October on a jump in food prices that pushed the annual rate to its highest level since December 2008... Annual inflation rose 8.81% from a year ago... The monthly increase was led by a 4.7% rise in food prices."

October 25 - Bloomberg (Iuri Dantas and Andre Soliani): "Brazil's 12-month current account gap widened to a record high in September as domestic demand and the real's rally boost spending on imports. The deficit in the current account, the broadest measure of trade and services, widened to $3.85 billion in September, pushing the annual gap to $47.3 billion..."

Unbalanced Global Economy Watch:

October 28 - Bloomberg (Simone Meier): "European confidence in the economic outlook improved more than economists forecast to the highest in almost three years in October, led by manufacturing sentiment."

October 26 - Bloomberg (Svenja O'Donnell): "Britain's economy grew at double the pace forecast by economists in the third quarter... Gross domestic product rose 0.8% in the three months through September after increasing 1.2% in the previous quarter..."

October 25 - Bloomberg (Jana Randow): "European Central Bank Governing Council member Axel Weber said Germany's budget deficit may drop below three percent next year. 'Next year, we may already be below 3%,' Weber said..."

October 28 - Bloomberg (Emma Ross-Thomas): "Spain is cutting its deficit faster than Ireland, Portugal or Greece, seeking to reassure investors that the nation deserves cheaper borrowing costs than its peers. Spain's central government trimmed the deficit by 42% in the first nine months, compared with 31% in Greece..."

October 27 - Bloomberg (Emma Ross-Thomas): "Spain's central government budget deficit narrowed by 42% in the first nine months as tax revenue surged and spending cuts took effect. The shortfall fell to 3.45% of gross domestic product from 5.96% a year earlier... Tax revenue on a cash basis rose 13.5% from a year earlier and personnel costs rose 2.7%."

October 28 - Bloomberg (Simone Meier): "Swiss central bank President Philipp Hildebrand said there are signs the bank's record-low interest rates could fuel a property bubble, suggesting he's growing uncomfortable with the current policy. 'The longer monetary policy remains expansive, the greater the risk that it will have undesirable consequences,' Hildebrand said..."

U.S. Bubble Economy Watch:

October 27 - Bloomberg (John Detrixhe): "U.S. companies are hoarding almost $1 trillion of cash, an amount Moody's... says shows borrowers are still concerned the economy may tip back into recession."

Central Bank Watch:

October 26 - Bloomberg (Craig Torres): "For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory. Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis... This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms. The goal is to unlock consumer spending and jump-start an economy that's growing too slowly to push unemployment lower. Estimates for the ultimate size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs... The danger is that once the Fed kindles price increases, inflation will be difficult to control. 'By reducing real interest rates and trying to break the psychology of 'Why spend today when I can buy goods cheaper tomorrow,' they are hoping to drive growth that would be more commensurate with a pickup in employment,' said Dan Greenhaus, chief economic strategist at Miller Tabak... 'The risk is a late 1970s type of scenario where the inflation genie gets out of the bottle.'"

October 26 - Bloomberg (Gabi Thesing): "Axel Weber is refusing to change his style even as speculation mounts that a lack of diplomacy is damaging his chances of becoming the next European Central Bank president. 'I always follow my own path and that has always served me well,' Weber, Germany's Bundesbank president, said... 'It's better to do a good job for eight years than always look to the next one.' Weber has broken ranks with his ECB colleagues by campaigning against the bank's bond-purchase program, raising doubts about whether he will be chosen to succeed Jean-Claude Trichet..."

October 26 - Bloomberg (Josiane Kremer and Janina Pfalzer): "Sweden's central bank raised its benchmark repo rate for a third time since July... The... Riksbank raised the seven-day repo rate by a quarter of a percentage point to 1%... 'The Swedish economy is growing rapidly,' the bank said... 'However, due to the weak developments overseas, it is not deemed that the repo rate needs to be raised so much in the coming years.'"

October 25 - Bloomberg (Michael Heath): "Reserve Bank of Australia Governor Glenn Stevens said flexible exchange rates alone won't spur growth or rebalance the global economy... 'We should be realistic about how much difference exchange rate flexibility would make to the unbalanced nature of growth in the global economy,' Stevens said... 'It is definitely part of the answer (and it is surely in the interests of the countries with closely managed rates to accept more flexibility), but it is no panacea.'"

Muni Watch:

October 27 - Bloomberg (Darrell Preston and Tim Jones): "Illinois, which shares the worst state credit rating with California, is draining its pension funds as candidates for governor promote plans that would cover less than a quarter of a record budget gap... Neither candidate's campaign responded to a request from Bloomberg News to detail his ideas to resolve the $13 billion deficit, the state's biggest ever and equivalent to about half its budget, or to fix its pension funds, whose liabilities will rise to $79.1 billion in fiscal 2011."