I wanted to dive a little deeper into John Taylor's March 29, 2012, Wall Street Journal op-ed, "The Dangers of an Interventionist Fed - A century of experience shows that rules lead to prosperity and discretion leads to trouble." The monetary policy "rules vs. discretion" debate is near and dear to my analytical heart, and I again tip my hat to Dr. Taylor for adeptly raising this critical issue. For this Bulletin, I'll shift the focus somewhat.

From John Taylor's article: "The Fed's discretion is now virtually unlimited. To pay for mortgages and other large-scale securities purchases, all it has to do is credit banks with electronic deposits -- called reserve balances or bank money. The result is the explosion of bank money... Before the 2008 panic, reserve balances were about $10 billion. By the end of 2011 they were about $1,600 billion. If the Fed had stopped with the emergency responses of the 2008 panic, instead of embarking on QE1 and QE2, reserve balances would now be normal. This large expansion of bank money creates risks. If it is not undone, then the bank money will eventually pour out into the economy, causing inflation. If it is undone too quickly, banks may find it hard to adjust and pull back on loans. The very existence of quantitative easing as a policy tool creates unpredictability, as traders speculate whether and when the Fed will intervene again. That the Fed can, if it chooses, intervene without limit in any credit market -- not only mortgage-backed securities but also securities backed by automobile loans or student loans -- creates more uncertainty and raises questions about why an independent agency of government should have such power."

Throughout this elongated Credit boom, conventional analysis has misunderstood the nature of inflation and misdiagnosed inflationary risks. As Dr. Taylor notes, considerable focus has more recently been directed to the banking system's huge ($1.6TN) excess reserve position as monetary fuel for future inflation. As the thinking goes, "If it is not undone, then the bank money will eventually pour out into the economy, causing inflation." I agree with the general premise that Fed policymaking is highly inflationary. I just disagree with the conventional view that the greatest risk lies in future periods when the banks eventually lend reserves currently parked at the Fed. Inflation risk is current as well as latent.

An increase in consumer prices is one type of inflation. Asset inflation is another, as is excess consumption and malinvestment. The key to analyzing inflationary price distortions is to focus on the dynamics of the underlying Credit expansion. What are the primary sources of new Credit (i.e. lending to finance sound investment as opposed to leveraging to finance speculative securities holdings or to buy homes or other assets)? And what are the associated impacts from this newly created purchasing power (i.e. higher consumer prices, rising asset prices, a spending or investment boom, etc.) and are these price effects generally sustainable, destabilizing, supportive of economic balance or, instead, imbalances? To be sure, it is essential to take a very broad-based approach to studying inflationary impacts - including pricing for goods and services, securities markets, commodities, as well as how Credit inflation is distorting incomes, government receipts/expenditures, investment and global financial flows.

From the perspective of my analytical framework, the inflation/expansion of Credit is the starting point for any meaningful analysis of inflationary effects. As has been the case now for the past two decades, asset inflation has been a predominant inflationary consequence of the rampant expansion of contemporary market-based Credit. A strong case can be made that asset inflation is a much more dangerous and unwieldy strain of inflation than rising consumer prices. Asset inflation is certainly not easily recognized by policymakers - and authorities will tend to view rising asset prices as both a positive development and even a show of confidence in their (loose) policies.

There is the misperception that the Trillions of deposits sitting on the Fed, the ECB, and other global central banks' balance sheets have yet to cause an inflationary impact. The truth of the matter is that these Trillions have circulated through global securities markets - and with momentous inflationary effect. This liquidity has ensured ongoing global Credit and speculative excess, while exacerbating global financial and economic imbalances. These days, the inflationary effects of "activist" central banking foment only greater systemic fragilities.

From Dr. Taylor: "The very existence of quantitative easing as a policy tool creates unpredictability, as traders speculate whether and when the Fed will intervene again." Again, I don't necessarily disagree. Unpredictability and uncertainty are important consequences. Yet the greater issue is that policy interventions over time have a profound impact on market perceptions, specifically nurturing a view that policymaking reduces unpredictability and ensures relative financial and economic stability. Importantly, and at this point this should be beyond dispute, "activist" policymaking works to inflate asset prices and fuel asset Bubbles.

The pricing and availability of derivatives and other forms of market insurance are profoundly impacted by the certainty of policy interventions, along with the various measures that are perceived to ensure market liquidity backstops. I would argue that the $1.6 TN of reserves is reflective of the massive Fed market interventions that have over the years validated deep flaws in the derivatives marketplace. The dangerous premise of "liquid and continuous markets" - the bedrock of dynamically-hedged derivative trading strategies - would have long ago been debunked if not for Fed activism. And there is absolutely no doubt that "activist" policies incentivize speculative leveraging. I find it astounding that CPI is stilled viewed as a greater systemic risk than historic speculative Bubbles and central banks' role in fanning a global financial mania.

April 19 - Financial Times (Sam Jones): "The global hedge fund industry has seen its assets swell to a new high... Hedge funds now manage an estimated $2.13tn in assets on behalf of pension funds, governments, asset managers and high net worth individuals, Hedge Fund Research said... The figures mean that the industry has added more than $700bn in assets since its post-crisis nadir in 2008 - the bulk of which has come thanks to positive recent performance from hedge fund managers."

LTRO and concerted central bank liquidity operations rescued global markets in late-2011. Despite the year-end rally, the hedge fund community still suffered one of its worst years (down 5.25%, according to the FT), second only to 2008. I would argue that policy interventions halted what would have otherwise been significant outflows from the leveraged speculating community. Instead, global markets were spurred higher and the hedge funds enjoyed net first-quarter inflow of about $13bn. And, according to the above Financial Times article, virtually all ($12.4bn) the inflows found their way into so-called "relative value funds."

I have recently underscored the strong first quarter performance of "relative value arbitrage" strategies, many that had positioned aggressively to profit from a LTRO-induced convergence of European bond yields. I have also posited that many of these trades might prove susceptible to renewed market stress and related concerns that the ECB may be less accommodative going forward than previously believed. I am growing increasingly confident in the view that European debt markets are highly vulnerable to a reversal of speculator leveraged holdings. A bout of market tumult, poor hedge fund performance, and self-reinforcing investor redemptions is not a low probability scenario. Indeed, the market's recent policy-induced upside dislocation has increased the likelihood of such an outcome.

Global markets have again turned unsettled. And while there is some uncertainty as to the timing of additional quantitative easing, the marketplace doesn't doubt that Chairman Bernanke will be ready with QE3 as needed. The real unpredictability is instead associated with the size of future interventions and whether such measures will suffice in a world of deepening Credit woes. There will come a point when the scope of the global Credit crisis finally surpasses the capacity of inflationary monetary policy.

The Spanish bond market persevered through the week (10-yr yield down 2bps). Meanwhile, heightened market nervousness was apparent in Italian and French debt markets. French 10-year yields jumped 14 bps, with the spread to German Bunds widening 17 bps to 137 (high since January). Italian bond yields rose 14 bps, with the spread to bunds widening 17 to 394 bps. French Credit default swap (CDS) prices rose 13 to 200 bps, this week trading above 200 bps for the first time since January 18th. Italian CDS surged 37 to 463 bps, the high since January 20th. Belgium CDS rose 13 to 265 bps (also high since 1/20).

The first round of French presidential elections comes Sunday. The top two finishers will then go head-to-head on May 6th. It is expected that President Sarkozy will face off against the Socialist, Francois Hollande. Mr. Sarkozy is unpopular and polls indicate that he is poised to be France's first one-term President in thirty years. Mr. Hollande has campaigned against "austerity" and has blamed the European crisis on the ECB's failure to "massively" purchase sovereign debt. Mr. Holland and Ms. Merkel will be an interesting pair. There is a lot to concern the marketplace, and expect more attention on the fact that France's debt-to-GDP ratio is rapidly approaching 90%. The stability of the expansive French banking sector is (again) a major market wildcard. Importantly, the European debt crisis this week took a more pronounced shift to the "core."

Here at home, market participants have remained fixated on earnings reports, the latest technology IPO, and daily economic reports. Our markets have for the most part been content to downplay Europe. Markets tend to be forward looking and, I believe, the marketplace is increasingly vulnerable to a tightening of financial conditions. In somewhat of a replay of 2011, a worsening European debt crisis has again become a clear and present danger as a potential catalyst for another bout of global de-risking/de-leveraging. This week provided added confirmation for the thesis of a deepening European debt crisis. And, not surprisingly, the week was less than conclusive as to the timing of when de-risking/de-leveraging might pose a significant threat to U.S. markets.

Volatility has certainty returned, and market internals would seem to support my thesis of increasing hedge fund vulnerability. Some of the favored sectors and many of the favored stocks have recently begun to underperform. Many commonly shorted stocks were especially volatile and seemed, at least as a group, to outperform. There are some indications of positions being unwound and initial indications of risk aversion. This is the type of unsettled backdrop that has in the past whittled away at market confidence.

For the Week:

In a week of heightened market volatility, the S&P500 returned 0.6% (up 9.6% y-t-d), and the Dow rose 1.4% (up 6.6%). The Morgan Stanley Consumer index jumped 1.4% (up 6.0%), and the Utilities gained 1.9% (down 2.8%). The Morgan Stanley Cyclical index was little changed (up 11.6%), while the Transports added 0.7% (up 4.3%). The Banks were up 0.8% (up 20.8%), while the Broker/Dealers were down 6.6% (up 18.3%). The broader market was resilient. The S&P 400 Mid-Caps gained 1.2% (up 11.1%), and the small cap Russell 2000 added 1.0% (up 8.5%). The Nasdaq100 was down 0.9% (up 17.5%), and the Morgan Stanley High Tech index declined 0.5% (up 17.1%). The Semiconductors were hit for 2.7% (up 11.2%). The InteractiveWeek Internet index added 0.3% (up14.4 %). The Biotechs surged 8.1% (up 31.1%). With bullion down $15, the HUI gold index dropped 2.5% (down 11.4%).

One-month Treasury bill rates ended the week at 3 bps and three-month bills closed at 7 bps. Two-year government yields were unchanged at 0.27%. Five-year T-note yields ended the week little changed at 0.84%. Ten-year yields declined 2 bps to 1.96%. Long bond yields were about unchanged at 3.13%. Benchmark Fannie MBS yields declined 3 bps to 2.89%. The spread between benchmark MBS and 10-year Treasury yields narrowed one to 93 bps. The implied yield on December 2013 eurodollar futures dipped a basis point to 0.67%. The two-year dollar swap spread was about unchanged at 30 bps. The 10-year dollar swap spread was unchanged at 11.5 bps. Corporate bond spreads ended the week mixed to narrower. An index of investment grade bond risk ended the week down 2 to 100 bps. An index of junk bond risk was little changed at 624 bps.

Debt issuance has slowed. Investment grade issuers included Lowes $2.0bn, Omnicom $750 million, Jefferies $750 million and Autozone $500 million.

Junk bond funds saw inflows of $636 million (from Lipper). Junk issuers included Monaco Spinco $500 million, Landry's $425 million, National Cinemedia $400 million, Ameristar Casinos $400 million, Mcron $275 million, Nationstar Mortgage $275 million, Resolute Energy $250 million, and Physiotherapy Associates $210 million.

Convertible debt issuance included Tibco Software $525 million and Micron Technologies $450 million.

International dollar bond issuers included Indonesia $4.25bn, British Columbia $2.5bn, Talent Yield Investments $800 million, Evraz Group $600 million, Inversiones CMPC $500 million, Nomos Bank $500 million, Hana Bank $500 million, Rexel $500 million, Turkiye Vakiflar Bankasi $500 million, China Shanshui Cement $400 million, Banco de Credito $350 million, and Promsvyazbk $400 million.

Spain's 10-year yields dipped 2 bps this week to 5.94% (up 90bps y-t-d). Italian 10-yr yields jumped 14 bps to 5.65% (down 138bps). Ten-year Portuguese yields dropped 82 bps to 11.42% (down 135bps). The new Greek 10-year note yield surged 27 bps to 20.90%. German bund yields were down 3 bps to 1.71% (down 12bps), while French yields jumped 14 bps to 3.08% (down 6bps). The French to German 10-year bond spread widened about 17 to 137 bps. U.K. 10-year gilt yields rose 14 bps to 2.17% (up 20bps). Irish yields were up 3 bps to 6.73% (down 153bps).

The German DAX equities index rallied 2.5% (up 14.4% y-t-d). Spain's IBEX 35 equities index dropped another 2.9% (down 17.8%), while Italy's FTSE MIB recovered 0.3% (down 4.6%). Japanese 10-year "JGB" yields dipped one basis point to 0.93% (down 5bps). Japan's Nikkei slipped 0.8% (up 13.1%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index increased 0.6% (up 10.1%), and Mexico's Bolsa gained 0.6% (up 6.1%). South Korea's Kospi index dropped 1.7% (up 8.2%). India's Sensex equities index rallied 1.6% (up 12.4%). China's Shanghai Exchange gained 2.0% (up 9.4%).

Freddie Mac 30-year fixed mortgage rates increased 2 bps to a four-wk high 3.90% (down 90bps y-o-y). Fifteen-year fixed rates rose 2 bps to 3.13% (down 89bps). One-year ARMs were up one basis point to 2.81% (down 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.47% (down 96bps).

Federal Reserve Credit jumped $21.7bn to $2.866 TN. Fed Credit was up $207bn from a year ago, or 7.8%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 4/18) increased $2.2bn to $3.491 TN. "Custody holdings" were up $71.2bn y-t-d and $72.8bn year-over-year, or 2.1%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $752bn y-o-y, or 7.8% to $10.4 TN. Over two years, reserves were $2.483 TN higher, for 31% growth.

M2 (narrow) "money" supply declined $6.2bn to $9.828 TN. "Narrow money" has expanded 6.9% annualized year-to-date and was up 9.6% from a year ago. For the week, Currency declined $1.5bn. Demand and Checkable Deposits declined $2.3bn, and Savings Deposits slipped $0.3bn. Small Denominated Deposits decreased $2.4bn. Retail Money Funds increased $0.4bn.

Total Money Fund assets were little changed at $2.584 TN. Money Fund assets were down $111bn y-t-d and $126bn over the past year, or 4.6%.

Total Commercial Paper outstanding rose $4.1bn to $933bn. CP was down $27bn y-t-d and $166bn from one year ago, or down 15.1%.

Global Credit Watch:

April 17 - Reuters (Paul Carrel and Andreas Framke): "Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes, not look to the European Central Bank to help by buying its bonds, European Central Bank policymaker Jens Weidmann told Reuters. Weidmann, who has led a push by some policymakers from core euro zone countries for the bank to begin planning an exit from its crisis mode, said no ECB policymakers favored using the bank's bond-buying plan to target specific interest rates on sovereign bonds... Weidmann... also said he saw no reason to discuss a third LTRO... Weidmann, who is head of Germany's Bundesbank, which gives him a powerful voice on the ECB's 23-man Governing Council, spoke to Reuters against a backdrop of growing tensions in Spain... 'We shouldn't always proclaim the end of the world if a country's long-term interest rates temporarily go above 6%,' he said. 'That is also a spur for policymakers in the countries concerned to do their homework and to win back (market) confidence through the pursuit of the reform path.' ...'The limits of the SMP have become apparent,' Weidmann said. 'At the same time, the program has not been ended by the ECB Council. Benoit Coeure described that.' 'I don't think you will find any colleague (on the ECB Council) who is of the view that the Eurosystem (of euro zone central banks) is there to ensure a particular interest rate level for a particular country.' ...Some investors are betting that the rise in Spanish borrowing costs will force the ECB to dust off its bond-buying program, but Weidmann suggested countries should not be looking to the central bank for such help. 'It is not our job to provide financial aid in order to extend necessary adjustments over time,' Weidmann said. 'That is exactly what the bailout fund is for.'"

April 18 - Deutsche Presse-Agentur (Jean-Baptiste Piggin): "Germany... rejected calls this week from economists and analysts for the European Financial Stability Fund (EFSF) to bail out Spain's struggling banks. 'There isn't any such discussion,' said Martin Kotthaus, the Finance Ministry spokesman, saying neither the EFSF nor its planned successor, the European Stability Mechanism (ESM), were empowered to help banks directly. Those funds can only aid governments.'"

April 18 - Bloomberg (John Glover and Ben Martin): "The debt of banks is trading at the biggest discount to the broader corporate bond market since the depths of the funding squeeze in November as Europe's sovereign crisis again threatens to rattle global financial markets. From Spain's Banco Santander SA to Morgan Stanley..., the cost of credit-default swaps on a basket of the largest banks in Europe and the U.S. is 266 bps, compared with 137 for the Markit iTraxx Europe Index of 125 companies with investment-grade ratings. The 129 basis-point spread is the most since it reached 133 on Nov. 30... 'The problem with emergency liquidity injections is that they become addictive,' said Alex Bellefleur, an analyst at Brockhouse & Cooper Inc... 'That is especially the case when injections are trying to fight underlying flows that are accelerating. This is the dynamic we are currently in.'"

April 19 - Bloomberg (Lorenzo Totaro): "Spain and Italy will be downgraded by Moody's... and Standard & Poor's this year as the recession and debt crisis worsen, economists and strategists at Citigroup Inc. said. Their credit ratings, along with those of Ireland and Portugal, will be lowered at least one level over the next two to three quarters, Citigroup said... 'Deficits will overshoot official forecasts in all the peripheral Economic Monetary Union countries this year and in 2013,' according to the report. 'Spain will need to enter some form of a Troika program' this year, Citigroup economists including London-based Juergen Michels wrote, referring to the aid package for Greece monitored by the European Union, the European Central Bank and the International Monetary Fund."

April 19 - Bloomberg (Emma Charlton): "Surging unemployment rates from Spain to Italy and Greece are threatening efforts to quell the region's debt crisis and keeping bond yields close to record premiums relative to benchmark German bunds. Joblessness is soaring as European nations reduce spending, igniting strikes and protests from Athens to Madrid. Unemployment in Spain surged to almost 24 percent, pushing the euro-region level to 10.8% in February, the highest in more than 14 years. Italy's rate is at 9.3%, the most since 2001, hampering efforts to spur economic growth."

April 18 - Bloomberg (Charles Penty): "Spain's surging bad loans are spurring doubt on whether the government can persuade investors that it can clean up the country's banks without further damaging public finances. Non-performing loans as a proportion of total lending jumped to 8.16% in February, the highest level since 1994, from less than 1% in 2007, according to Bank of Spain data published today. The ratio rose from 7.91% in January as 3.8 billion euros of loans soured in February, a 110% increase from the same month a year ago. That takes the total credit in the economy that the regulator lists as 'doubtful' to 143.8 billion euros. Defaults are rising and credit is shrinking at a record pace as 24% unemployment corrodes the quality of loans built up in the country's credit boom and saps the appetite of banks to make new ones. Doubts about the extent of Spain's non-performing loans problem is hurting bank stocks and driving up the government's borrowing costs on investor concern that the expense of propping up ailing lenders may add to the debt burden."

April 17 - Bloomberg (Esteban Duarte): "Bonds backed by Spanish consumer and business loans initially sold with investment-grade ratings are performing worse than their European peers, according to Moody's... Nine out of 14 European securitization transactions tracked by Moody's that were downgraded to the lowest ratings or default status contained Spanish assets, said Annick Poulain, a managing director... 'We expect that performance of transactions, especially in Spain, keeps deteriorating due to the challenging economic situation,' Poulain said... 'The speed and severity of the economic downturn was surprising, and the negative impact on collateral performance was greater than our original assumptions.'"

April 17 - Bloomberg (Angeline Benoit and Emma Ross-Thomas): "Spain's central bank chief said the country risks missing deficit estimates unveiled last month just hours after a successful bill sale dissipated some concerns that the government may have to seek a bailout. 'The projected course of total revenues in the budget is subject to downside risks,' Bank of Spain Governor Miguel Angel Fernandez Ordonez told a parliamentary committee..."

April 18 - Bloomberg (Chiara Vasarri and Lorenzo Totaro): "Italian Prime Minister Mario Monti pushed back his balanced-budget goal amid a deepening recession, six weeks after Spain helped reignite Europe's debt crisis by abandoning its own deficit target. The Italian government, which had vowed to balance the budget in 2013, now expects a shortfall of 0.5% of gross domestic product next year, the Cabinet said..."

April 18 - Bloomberg (Sonia Sirletti): "Bad loans at Italian banks rose to the highest level in more than 11 years as the nation's economy endures its fourth recession since 2001 and the sovereign-debt crisis drives up funding costs for companies. Non-performing loans as a proportion of total lending rose to 6.3% in February from 6.2% in January... That's... up from 3% in June 2008..."

April 20 - Bloomberg (Jack Jordan): "Investors in the credit markets are showing a greater wariness of Francois Hollande winning the French presidency than Vladimir Putin defying protesters to return to the Kremlin. The cost of insuring Russia's debt has dropped 76 to 199 bps this year, two bps below France, which is rated eight levels higher by Fitch Ratings at AAA..."

April 17 - Bloomberg (Gabi Thesing): "The European Central Bank should cut interest rates and keep its crisis measures in place to help euro-region growth and support the banking system, according to the International Monetary Fund. 'Given the broad need for fiscal adjustment, much of the burden of supporting growth falls on monetary policy,' the Washington-based lender said... 'The ECB should lower its policy rate while continuing to use unconventional policies to address banks' funding and liquidity problems.'"

April 18 - Bloomberg (Sandrine Rastello): "European banks could be forced to sell as much as $3.8 trillion in assets through 2013 and curb lending if governments fall short of their pledges to stem the sovereign debt crisis or face a shock their firewall can't contain, the International Monetary Fund said. In a study of 58 banks including BNP Paribas SA and Deutsche Bank AG, the IMF forecast that under such circumstances, gross domestic product in the 17-country euro region would be 1.4% lower than now expected after two years. Even under its baseline scenario, the IMF sees banks' combined balance sheets possibly shrinking by as much as $2.6 trillion."

April 20 - Bloomberg (Marcus Bensasson, Maria Petrakis and Natalie Weeks): "Greece's four biggest banks reported a combined loss of 27.9 billion euros ($36.9bn) for last year after participating in the country's debt exchange, the largest sovereign restructuring in history."

April 18 - Bloomberg (Kevin Crowley): "Greece will probably leave the euro zone within the next year and more countries may follow as austerity measures dictated by Germany prove too tough to implement, according to Threadneedle Investments. 'Our endgame scenario is that there'll be a number of exits,' Mark Burgess, chief investment officer of Threadneedle, which manages 73 billion pounds ($117bn), said... 'I suspect that Greece will leave within 12 months.' Greeks are readying themselves for a general election next month with unemployment at a record 21% and the economy set to shrink for a fifth straight year."

April 17 - Bloomberg (Gregory Viscusi): "The European Central Bank could have prevented the euro region's debt crisis had it 'massively' bought Greek bonds at the outset, French Socialist presidential candidate Francois Hollande said. The Frankfurt-based central bank has become a target in the final days of the French campaign. Hollande's remarks followed President Nicolas Sarkozy's call yesterday to debate expanding the ECB's mandate to include spurring growth and not just controlling inflation... Sarkozy had made extending the role of the ECB, in effect giving it a mandate similar to the U.S.'s Federal Reserve, an issue in his successful 2007 campaign... France holds the first round of its presidential elections on April 22 with the runoff on May 6. Hollande would win a head- to-head race by 56% to 44%, according to a TNS Sofres survey on April 13."

April 18 - Deutsche Presse-Agentur (Christian Ebner): "The public debt of Germany, which has campaigned for more austerity in the eurozone, grew last year to a record 2.09 trillion euros, a rise of 32 billion euros, according to figures... from the Bundesbank. But the ratio of debt to gross domestic product (GDP) at the end of the year declined to 81.2%... The drop by 1.8 percentage points was because of a sharp rise in nominal GDP that outweighed the slight rise in debt. That debt ratio is still well above the permitted level of 60% permitted by European Union stability rules."

Global Bubble Watch:

April 20 - Bloomberg (Simon Kennedy and Sandrine Rastello): "Governments committed more than $430 billion in fresh money to the International Monetary Fund to help it protect the world economy against deepening debt turmoil in Europe. The near-doubling of the fund's firepower was announced after Group of 20 finance ministers and central bankers met today in Washington. While the U.K. and Saudi Arabia were among those making specific pledges, Brazil said emerging markets would condition their help on being handed more power at the IMF."

April 17 - Bloomberg (Charles Mead): "Corporate bond sales worldwide are faltering after setting a record in the first quarter as doubts about the strength of the economic recovery and Europe's sovereign-debt crisis resurface. From the U.S. to Europe and Asia, issuance has fallen to the lowest levels of the year in the past two weeks... Offerings this month of $87 billion from borrowers led by Deere & Co., the largest maker of agricultural equipment, and... Royal Bank of Canada compare with a weekly average of $89.9 billion in the first three months of 2012. Sales are dwindling even as yields on bonds have fallen almost 1 percentage point from last year's high of more than 5% in October, showing reduced confidence in the global outlook among borrowers."

April 20 - Bloomberg (Sridhar Natarajan): "Investment-grade corporate bond yields in the U.S. fell to a record low as the economy grows enough to allow borrowers to meet debt payments while failing to spark faster inflation that would boost equities. Yields declined to 3.392% yesterday, below the previous record of 3.404% set on March 2..."

April 19 - Bloomberg (Charles Mead): "Ratings cuts on investment-grade companies as a result of debt-financed share buybacks are accelerating even as concerns remain about the U.S. economic recovery, according to Fitch Ratings. Fitch took 12 negative rating actions last year based at least partly on stock repurchases, compared with three in 2010, analysts led by Philip Zahn wrote... Six or more buyback programs were accelerated in 2011 without a change in the company's rating."

April 18 - Bloomberg (Ben Bain and Nacha Cattan): "Mexico's foreign reserves are rising to a record, helping lure overseas investors to the country's local bond market. Reserves jumped to $151.5 billion last week, representing a 23% increase from a year ago... Mexico's soaring reserves are boosting confidence among investors that Latin America's second-biggest economy has the resources to prevent a tumble in the peso if Europe's debt crisis worsens and growth in the U.S. slows."

Currency Watch:

The U.S. dollar index declined 0.9% this week to 79.19 (down 1.2% y-t-d). On the upside for the week, the South African rand increased 1.8%, the British pound 1.7%, the Swedish krona 1.5%, the Norwegian krone 1.2%, the Swiss franc 1.2%, the Danish krone 1.1%, the euro 1.1%, the Canadian dollar 0.7% the Mexican peso 0.6% and the Australian dollar 0.1%. On the downside, the Brazilian real declined 1.8%, the Japanese yen 0.7%, the New Zealand dollar 0.5%, and the South Korean won 0.4%.

Commodities Watch:

The CRB index slipped 0.5% this week (down 1.3% y-t-d). The Goldman Sachs Commodities Index declined 0.8% (up 4.9%). Spot Gold lost 0.9% to $1,643 (up 5.1%). Silver added 0.8% to $31.72 (up 1%). June Crude increased 56 cents to $103.88 (up 5%). May Gasoline sank 6.1% (up 18%), and May Natural Gas declined 2.7% to a new decade low (down 36%). July Copper rose 2% (up 8%). May Wheat ended the week unchanged (down 5%), while May Corn fell 2.7% (down 5%).

China Watch:

April 17 - Bloomberg (Fion Li and Kyoungwha Kim): "The yuan fell by the most in a week against the dollar as China's central bank doubled the daily trading band, reflecting declines in emerging-market currencies. The People's Bank of China now allows 1% moves from a daily fixing, after keeping the limit at 0.5% since May 2007."

April 19 - Bloomberg (Fox Hu): "Profit warnings, auditor disputes and delistings involving Chinese companies trading on foreign exchanges are fueling investor distrust, wiping out valuations and poisoning the market for new listings. The 180 Chinese firms that went public in New York, Hong Kong and on other global exchanges since the start of 2010 are trading on average 21% below their offer prices..."

April 16 - Bloomberg (Michelle Wiese Bockmann): "China will pass the U.S. in 2013 as the biggest user of tankers carrying oil at sea as Asian imports travel over longer distances and fewer cargoes go to the world's biggest economy, according to Arctic Securities ASA.... Chinese tanker usage will gain 18% to 2.43 trillion ton-miles by 2013 as the U.S. falls 13% to 2.36 trillion, Arctic estimates."

India Watch:

April 19 - Wall Street Journal (Prasanta Sahu): "India's trade deficit in the last fiscal year ballooned to its highest ever level, driven by a surge in imports of crude oil and precious metals... Exports rose 21% from a year earlier to $303.7 billion in the last fiscal year... However, that figure was dwarfed by a 32.1% expansion in imports to $488.6 billion. This pushed the trade deficit--a key piece of the current account deficit--to $184.9 billion from $118.6 billion in the previous year."

April 17 - Bloomberg (Kartik Goyal): "India slashed its benchmark interest rate by a greater-than-forecast half a percentage point, seeking to bolster growth with the first reduction since 2009. Inflation might limit the room for further cuts, the central bank said. Governor Duvvuri Subbarao lowered the repurchase rate to 8% from 8.5%..."

Latin America Watch:

April 17 - Bloomberg (Eliana Raszewski and Charlie Devereux): "Argentine President Cristina Fernandez de Kirchner is taking a page from Hugo Chavez's playbook by seizing control of oil producer YPF SA and blaming foreign companies for the country's energy shortages. Fernandez, 59, shut out of global credit markets following her country's 2001 debt default and facing slowing growth at a time of 23% inflation, turned to tactics used by Venezuela's socialist leader when she ordered yesterday the expropriation of 51% of the nation's biggest oil producer owned by Spain's Repsol YPF SA. The move follows Fernandez's 2008 seizure of $24 billion in private pension funds and her tapping of central bank reserves to make debt payments."

Europe Economy Watch:

April 19 - UK Telegraph (Ambrose Evans-Pritchard): "Controversy is raging in Germany over soaring 'payments' by the Bundesbank to shore up Europe's monetary system and cope with a tidal wave of capital flight from southern Europe. Professor Hans-Werner Sinn, head of Germany's IFO Institute, said German taxpayers are facing a dangerous rise in credit risk from a plethora of bail-out schemes. 'The euro-system is near explosion,' he told Austria's Economics Academy... Dr Sinn said Germany is on the hook for much of the €2.1 trillion (£1.72 trillion) in rescue measures for EMU debtors - often by the back-door - that will saddle Germans with ruinous losses one day. 'It is a horror scenario,' he said, warning that the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors, exactly the opposite of what was hoped. Earlier this week, the Foundation for Family Business in Munich filed a criminal lawsuit against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens. The furore follows a sharp jump in the Bundesbank's 'Target2' claims within the European Central Bank's internal payment network from €547bn in February to €616bn in March."

April 19 - Bloomberg (Emma Ross-Thomas and Charles Penty): "Multinationals may be moving deposits out of Spain, said Jose Maria Roldan, head of banking regulation at the Bank of Spain... Deposits fell 4.1% in February from a year earlier... 'There has also been an observable increase in investment in deposits in the rest of the world, especially by companies, foreseeably multinationals, that would explain around 15% of the decrease,' he said."

U.S. Bubble Economy Watch:

April 17 - Bloomberg (David Wilson): "As the cost of attending U.S. colleges and universities surges, student-loan debt is turning into 'a significant drag on the housing market,' according to Pierre Lapointe, a Brockhouse & Cooper Inc. strategist. ...tuition expense has risen about three times as fast as wages since 2001 before accounting for inflation, according to data from the Labor Department... At the same time, the average wage for American workers between the ages of 25 and 34 dropped 7%. Borrowing to pay for college exceeded $1 trillion within the past few months..."

April 18 - Bloomberg (Josh Block and Janet Lorin): "Law school graduates are leaving college with an average of $100,433 in debt at a time when new lawyers outnumber legal jobs, according to a survey from U.S. News & World Report. Graduates of California Western School of Law have an average of more than $153,000 in loans, the most among law schools nationwide... Average tuition and fees for private law schools have jumped 73% since 1999 to $35,743 in 2009, an American Bar Association survey shows."

Central Bank Watch:

April 20 - Bloomberg (Jeff Black and Meera Louis): "European Central Bank Governing Council member Ewald Nowotny said the bank only buys government bonds in certain situations and with 'extreme' caution. 'This program is not to be seen as a permanent feature of our tool box... We use it extremely cautiously and according to the specific situation' and it is not needed 'for the time being.'"

April 19 - Bloomberg (Tony Czuczka): "European Central Bank Executive Board member Peter Praet said it's up to euro-area governments to find a lasting solution to the debt crisis, not the ECB. The success of the ECB's crisis measures 'should not let anyone believe that monetary policy is the medicine that can solve the underlying, more structural problems in the euro area,' Praet said... 'The lasting resolution of the crisis is the responsibility of the euro area governments.'"

Muni Watch:

April 19 - Bloomberg (JoAnne Norton): "States' tax collections grew for the eighth straight quarter at the end of 2011, for the first time topping peak revenue levels seen at the start of the most recent recession, according to the Rockefeller Institute of Government and Census Bureau data. States' tax revenues rose by 3.6% in the fourth quarter of 2011, compared with a year ago."