The S&P500 gained 1.6% (down 4.7% y-t-d), and the Dow rose 1.5% (down 4.5%). The Utilities were little changed (up 6.5%). The Banks increased 1.3% (down 15.6%), and the Broker/Dealers rallied 2.9% (down 15.7%). The Transports gained 1.6% (down 1.4%). The broader market outperformed. The S&P 400 Midcaps jumped 2.6% (down 4.2%), and the small cap Russell 2000 rose 2.7% (down 8.7%). The Nasdaq100 gained 1.7% (down 7.8%), and the Morgan Stanley High Tech index jumped 3.5% (down 8.9%). The Semiconductors surged 3.2% (down 5.9%). The volatile Biotechs ended the week unchanged (down 24.7%). Though bullion was down $3, the HUI gold index added 1.8% (up 45.3%).

Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields rose five bps to 0.79% (down 26bps y-t-d). Five-year T-note yields increased a basis point to 1.24% (down 51bps). Ten-year Treasury yields dipped a basis point to 1.74% (down 51bps). Long bond yields added three bps to 2.64% (down 38bps).

Greek 10-year yields fell 25 bps to 10.00% (up 268bps y-t-d). Ten-year Portuguese yields sank 35 bps to 3.05% (up 53bps). Italian 10-year yields fell nine bps to 1.47% (down 12bps). Spain's 10-year yields dropped 13 bps to 1.57% (down 20bps). German bund yields declined five bps to 0.15% (down 47bps). French yields fell six bps to 0.50% (down 49bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields slipped a basis point to 1.40% (down 56bps).

Japan's Nikkei equities index recovered 1.4% (down 14.9% y-t-d). Japanese 10-year "JGB" yields fell eight bps to a record low negative 0.08% (down 41bps y-t-d). The German DAX equities index increased 1.3% (down 11.4%). Spain's IBEX 35 equities index gained 1.9% (down 12.5%). Italy's FTSE MIB index rose 3.4% (down 18.4%). EM equities were mixed. Brazil's Bovespa index was little changed (down 4.1%). Mexico's Bolsa added 0.2% (up 1.2%). South Korea's Kospi index increased 0.2% (down 2.1%). India's Sensex equities index fell 2.3% (down 11.3%). China's Shanghai Exchange dropped 3.2% (down 21.8%). Turkey's Borsa Istanbul National 100 index jumped 2.6% (up 4.5%). Russia's MICEX equities index gained 1.3% (up 3.1%).

Junk funds saw inflows surge to $2.7 billion (from Lipper). From Reuters (Trevor Hunnicutt) "Investment-grade corporate debt funds took in $142 million, offering relief from net withdrawals of $19 billion over the prior 13 weeks."

Freddie Mac 30-year fixed mortgage rates slipped three bps to a more than two-year low 3.62% (down 18bps y-o-y). Fifteen-year rates declined three bps to 2.93% (down 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 3.70% (down 59bps).

Federal Reserve Credit last week declined $11.4bn to $4.448 TN. Over the past year, Fed Credit fell $11.7bn, or 0.3%. Fed Credit inflated $1.637 TN, or 58%, over the past 172 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.2bn to an 11-month low $3.254 TN. "Custody holdings" were down $12.2bn y-o-y, or 0.4%.

M2 (narrow) "money" supply last week recovered $48.8bn to $12.464 TN. "Narrow money" expanded $647bn, or 5.5%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $62.6bn, while Savings Deposits fell $15.2bn. Small Time Deposits were little changed. Retail Money Funds slipped $0.9bn.

Total money market fund assets jumped $15.1bn to $2.778 TN. Money Funds rose $87bn y-o-y (3.2%).

Total Commercial Paper fell $7.8bn to $1.076 TN. CP expanded $49.6 billion y-o-y, or 4.8%.

Currency Watch:

February 25 - Bloomberg (Lananh Nguyen): "The specter of shrinking liquidity gripping fixed-income desks globally is creeping its way into the world's biggest, most liquid financial market. Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity -- or the prospects of it drying up entirely during times of market stress -- that dominated discussions this week at the TradeTech FX conference in Miami. Pension funds, hedge funds and other asset managers were seeking answers after a string of so-called flash crashes in recent months sent some of the world's most-traded currencies plunging."

The U.S. dollar index rallied 1.6% this week to 98.09 (down 0.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.8% and the Brazilian real 0.5%. For the week on the downside, the South African rand declined 5.0%, the British pound 3.7%, the euro 1.8%, the Norwegian krone 1.5%, the Swedish krona 1.4%, the Japanese yen 1.2%, the Swiss franc 0.6% and the Australian dollar 0.3%. The Chinese yuan declined 0.3% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.1% (down 3.7% y-t-d). Spot Gold slipped 0.3% $1,223 (up 15.3%). March Silver dropped 4.2% to $14.71 (up 6.6%). April WTI Crude surged $3.14 to $32.78 (down 11.5%). March Gasoline rallied 6.0% (down 20%), while March Natural Gas lost 0.6% (down 24%). March Copper gained 1.9% (down 1%). May Wheat fell 3.1% (down 4%). May Corn dropped 2.6% (unchanged).

Fixed-Income Bubble Watch:

February 25 - Wall Street Journal (Sam Goldfarb and Liz Hoffman): "Goldman Sachs... is struggling to sell $2 billion in bonds backing the buyout of software firm Solera Holdings Inc., another sign of cracks in the market for the low-rated debt that has been a key driver of the takeover boom. Solera's sale to Vista Equity Partners was one of the biggest leveraged buyouts of last year, at $6.5 billion including debt, and has been widely viewed as a test of the credit market. The bond sale comes at a time when U.S. junk-bond issuance has dropped more than 70% from a year ago and borrowing costs have increased... The pullback threatens a mergers-and-acquisitions boom that has been driven partly by cheap and available credit. It also comes as a wave of debt from the last buyout boom is coming due..."

February 21 - Wall Street Journal (Matt Wirz and Matt Jarzemsky): "Wall Street has long wondered what would happen if a wave of refinancing meets with a weakened junk-bond market. Toys "R" Us Inc. will be an early test case. The 68-year-old toy retailer is trying to replace $1.6 billion in junk-rated bonds coming due through 2018... Other heavily indebted borrowers face similar pressure to refinance amid risks of a prolonged swoon for the market. U.S. companies have a total of $1.32 trillion in junk debt maturing between now and 2020, according to Standard & Poor's... That includes $92.3 billion coming due this year, followed by $160.9 billion in 2017 and $272.5 billion in 2018."

February 25 - Bloomberg (Meenal Vamburkar and Cordell Eddings): "They have sold off hundreds of oil fields, eliminated thousands of jobs and slashed millions of dollars from capital spending and dividends. But in this unforgiving new world of $30-a-barrel oil, it's barely been enough. As U.S. oil executives... take drastic measures to weather the worst slump in a generation and cling to their debt ratings, creditors are already writing some of them off. So much so that late last month, average borrowing costs for energy bonds with the lowest investment grades -- issues totaling $258 billion -- soared past those of the highest-rated U.S. junk borrowers for the first time. What's more, debt issuance industry wide has all but ground to a halt after a record year in 2015."

February 25 - Bloomberg (Asjylyn Loder, Donal Griffin and Jodi Xu Klein): "In less than a month, the U.S. oil bust could claim two of its biggest victims yet. Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, didn't pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy... 'We're just beginning to see how bad 2016 is going to be,' said Becky Roof, managing director... with consulting firm AlixPartners."

February 23 - Reuters (Tom Hals): "Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit U.S. oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers are trying to use Chapter 11 bankruptcy protection to shed long-term contracts with the pipeline operators that gather and process shale gas before it is delivered to consumer markets."

Global Bubble Watch:

February 24 - Reuters (Terry Wade and Anna Driver): "Germany's Minister of Finance Wolfgang Schaeuble said on Friday that the expansive fiscal and monetary policies implemented by governments to spur growth might have laid the foundation of the next economic crisis. Those debt-financed fiscal policies and accommodative monetary policies had been only moderately successful in promoting growth, with public and private debt levels in the world now too high, Schaeuble said. 'Fiscal as well as monetary policies have reached their limits. If you want the real economy to grow there are no shortcuts which avoid reforms,' Schaeuble said. 'Talking about further stimulus just distracts from the real tasks at hand... We, therefore, do not agree on a G20 fiscal stimulus package as some argue in case outlook risks materialize... The debt-financed growth model has reached its limits. It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy'."

February 22 - Bloomberg (Matthew Philips): "One of the loudest creaking sounds coming from the markets right now is the global economy straining under a record pile of debt. The world has continued to borrow hand over fist since the financial crisis, adding nearly $60 trillion since 2007 in the process of pushing the worldwide debt load to $200 trillion, or nearly three times the size of the entire global economy. And that figure takes us only to 2014... But no matter how you measure, global debt levels are raising alarms over whether we're on the brink of another debt-fueled economic meltdown. The potential for disaster depends on how contagious a new round of defaults would prove and whether writedowns in one part of the world could cause losses in others. That's what happened in the last two major debt crises, which rippled through the global economy."

February 25 - Wall Street Journal (Chuin-Wei Yap and Mark Magnier): "A surge of corporate bonds is adding to China's already-high debt levels, amplifying risks to the economy as Beijing persistently encourages borrowing to fuel growth. The new rounds of corporate funding deepen anxieties among investors and analysts that China's debt, already expanding at twice the pace of its gross domestic product, is feeding a nascent credit crisis... Corporate debt now amounts to 160% of China's gross domestic product, compared with 98% in 2008, according to Standard & Poor's... The level in the U.S. is 70%. Outstanding corporate bonds in China last year surged 25% to 14.6 trillion yuan ($2.2 trillion)..."

February 21 - Financial Times (Attracta Mooney and Madison Marriage): "Asset managers suffered record outflows from sovereign wealth funds in 2015 and have been warned to expect even greater redemptions this year as the oil price collapse drives governments to raid their state-owned investment vehicles. State funds pulled at least $46.5bn from asset managers in 2015 -- far greater than the sovereign outflows recorded at the height of the financial crisis -- in a bid to prop up their economies, according to... eVestment..."

U.S. Bubble Watch:

February 20 - Financial Times (Barney Jopson): "Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned. Fannie Mae's chief executive and its regulator are sounding the alarm on a decline in the institution's capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds. Their warnings highlight Washington's inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis."

February 24 - Reuters (Terry Wade and Anna Driver): "Prices for mansions in Houston's swankiest neighborhood have tumbled in lock step with crude prices. The Houston Opera has offered free season tickets to patrons who lost their jobs in the oil bust. A fancy restaurant offers cut-price dinners. Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world's oil capital are among the hardest hit largely because tanking energy firm shares make up much of oil and gas executives' compensation... While Houston's economy is far more diversified now than in the 1980s when the city lost 13% of its jobs, it remains home to 5,000 energy-related firms and the fortunes of oil and gas executives are tied more than ever to the energy market."

February 24 - Wall Street Journal (Katy McLaughlin): "Los Angeles' luxury market is blazing -- and it has nothing to do with droughts or fires. Median sale prices of single-family homes increased by 37% in Beverly Hills and 12% in Bel Air and Holmby Hills in 2015 compared with the year before, according to Jonathan Miller, a real-estate appraiser... Even in this heady market, some deals stand out. Josh Flagg, executive sales director at Rodeo Realty, sold three houses on behalf of clients last year -- twice. In each instance, he sold the homes the second time for roughly $1 million more than the first time -- even though no or few improvements were made to the properties, according to Mr. Flagg."

February 26 - Wall Street Journal (Ryan Dezember and Matt Jarzemsky): "Blackstone Group LP co-founder and Chief Executive Stephen Schwarzman collected $799.2 million in 2015, up from $689.3 million in 2014, despite market turmoil that battered the firm's stock and threatened to slow a frenzied stretch of selling that has driven big profits."

February 23 - Reuters (Carmel Crimmins): "Cash-strapped energy firms are coming under increasing pressure from U.S. bank lenders and, on average, could see a 15% to 20% cut in their credit lines, the head of JP Morgan's commercial bank told investors... Until now, banks could be more lenient with their energy clients despite a prolonged slump in the price of oil, but Doug Petno, the head of JP Morgan's commercial bank, said that is changing. Moves, disclosed in securities filings, by oil and gas companies... to max out revolving credit lines - designed to cover short-term funding gaps - have prompted banks to take action."

February 22 - Bloomberg (Matt Scully): "More borrowers with spotty credit are failing to make monthly car payments on time, a troubling sign for investors who have snapped up billions of dollars of securities backed by risky auto debt. Delinquencies on subprime auto loans packaged into bonds rose in January to 4.7%, a level not seen since 2010... What may be most troubling, however, is that the default rate is already climbing, up to 12.3% in January from 11.3% the prior month. That is the highest rate since 2010..."

China Bubble Watch:

February 24 - New York Times (Edward Wong and Neil Gough): "This month, Chinese banking officials omitted currency data from closely watched economic reports. Weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock. Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets. Chinese leaders are taking increasingly bold steps to stop rising pessimism about turbulent markets and the slowing of the country's growth. As financial and economic troubles threaten to undermine confidence in the Communist Party, Beijing is tightening the flow of economic information and even criminalizing commentary that officials believe could hurt stocks or the currency."

February 25 - Bloomberg (Dexter Roberts): "China has had an overcapacity problem in its aluminum, chemical, cement, and steel industries for years. Now it's reaching crisis levels. 'The situation has gone so dramatically bad that action has to happen very soon,' said Jörg Wuttke, president of the European Union Chamber of Commerce in China... That report's conclusion: 'The Chinese government's current role in the economy is part of the problem,' while overcapacity has become 'an impediment to the party's reform agenda.' Many of the unneeded mills, smelters, and plants were built or expanded after China's policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire. China produces more than double the steel of Japan, India, the U.S., and Russia -- the four next-largest producers -- combined..."

Central Bank Watch:

February 24 - Bloomberg (Jeanna Smialek and Lucy Meakin): "Mario Draghi has two weeks left to decide how to ramp up stimulus in a way that doesn't upset either his colleagues or investors. When European Central Bank policy makers meet in Frankfurt from March 9-10, they'll consider whether negative interest rates and 60 billion euros ($67bn) a month of debt purchases is enough to revive consumer prices... The ECB president has said there are no limits to how far policy makers will go within their mandate, yet sub-zero rates carry risks and expanding QE is easier said than done."

February 24 - Bloomberg (Paul Gordon and Hans Nichols): "The European Central Bank must be wary of introducing fresh stimulus that could backfire and weaken the transmission of policy to the economy, Governing Council member Jens Weidmann said. 'What matters for us is that we don't produce counterproductive effects,' Weidmann, who heads Germany's Bundesbank, said... 'If through the effect on, for instance, the stability of banks our measures produce the opposite of what we want then it wouldn't be smart to embrace them in the first place.'"

February 24 - Reuters (John O'Donnell): "Bank profits will shrink if rock-bottom interest rates stay in place for too long, the head of Germany's central bank warned..., signaling that he favors an eventual change in tack. The remarks from the Bundesbank's influential president, Jens Weidmann, illustrate how seriously Germany is taking the fallout from years of low borrowing rates after a recent crash in bank stocks sucked in the country's flagship Deutsche Bank . 'The low interest-rate environment particularly weighs on banks' earnings potential,' Weidmann told journalists.... 'The longer the low-interest-rate phase stays, the steeper interest rates fall, the ... smaller banks' profit,' said Weidmann..."

February 23 - Bloomberg (Toru Fujioka Masahiro Hidaka): "Almost three years after taking the helm at Japan's central bank, Governor Haruhiko Kuroda has hinted that his view on the power of monetary policy has shifted, after an unprecedented stimulus program failed to achieve his inflation target. 'It's not that the monetary base alone will pull up inflation or inflation expectations promptly,' Kuroda said in parliament... 'We aim to raise prices through an increase in inflation expectations and a tighter gap in supply and demand under QQE,' he said, referring to qualitative and quantitative easing measures."

February 21 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda... blamed investors' 'excessive' risk aversion for persistent market volatility, and defended the central bank's decision to adopt a negative interest rate policy in the face of questions about its effectiveness. The BOJ chief also shrugged off criticism that the radical stimulus policy risked destabilizing Japan's banking system by squeezing returns on lending..."

EM Bubble Watch:

February 26 - Bloomberg (Nacha Cattan and Isabella Cota): "Mexico's surging debt load is raising red flags for Deutsche Bank AG and Barclays Plc. The broadest measure of debt as a percentage of gross domestic product has swelled to 46% from 38% in President Enrique Pena Nieto's first three years in office as plunging oil prices eroded government revenue and a weak peso made it more expensive to borrow in dollars... According to the Bank of International Settlements, the debt burden is the highest since 1995, during the so-called Tequila Crisis, when panicked investors sold off their short-term debt and sparked a peso depreciation. The International Monetary Fund estimates that the figure is at least as high as 1996."

Brazil Watch:

February 23 - Bloomberg (David Biller): "Brazil's annual inflation surprised analysts by accelerating in the month through mid-February after the central bank refrained from raising borrowing costs and the government proposed loosening its fiscal targets. Annual inflation... quickened to 10.84% -- its highest level since November 2003. Inflation accelerated to 1.42% from 0.92% a month earlier..."

February 24 - Bloomberg (Paula Sambo and Filipe Pacheco): "Brazil's sovereign rating was cut to junk by Moody's..., the last of the major ratings companies to strip the country of its investment grade, as President Dilma Rousseff struggles to shore up fiscal accounts amid deepening political turmoil."

February 24 - Bloomberg (Filipe Pacheco and Chiara Vasarri): "Banco do Brasil SA is getting crushed in the bond market because of its government ties. Contingent-convertible notes issued by the state-controlled bank, which are vulnerable to being written down to zero if capital ratios fall too low, have fallen the most among 133 similar CoCo securities denominated in euros or dollars. The bank's $1.64 billion of bonds sold in 2012 have tumbled 25% in 2016, seven times the average."

Leveraged Speculation Watch:

February 25 - Bloomberg (Matthew Philips): "Assets managed by hedge funds globally last month fell to less than $3 trillion for the first time since the industry hit the milestone in May 2014, according to... eVestment. Investors pulled a net $21.5 billion, the most in the opening month of a year since 2009, while losses led to a $43.2 billion drop in assets under management. The industry managed $2.96 trillion at the end of January. Hedge funds that suffered losses last year were hit by redemptions worth $24.8 billion in January. Equity, fixed-income and multistrategy hedge funds suffered net outflows..."

February 23 - Bloomberg (Julie Verhage): "While hedge funds have slightly outperformed the S&P 500 so far in the dire start to 2016, it turns out stocks with the lowest amount of ownership by the industry are performing better than the ones it loves. According to the most recent 'Hedge Fund Monitor' from David Kostin, chief U.S. equity strategist for Goldman..., which analyzes 860 hedge funds with $1.6 trillion is gross equity positions, the most popular stocks have continued to lag the market. The stocks with the lowest concentration of hedge fund ownership beat the S&P 500 53% of the time, Kostin says. This year, the basket outperformed the broader index by 541 bps."

Europe Watch:

February 20 - Bloomberg (Alex Morales and Robert Hutton): "Prime Minister David Cameron said he'll hold a long-pledged referendum on the U.K.'s membership of the European Union on June 23, signaling the start of a four-month campaign that immediately exposed rifts in his Conservative Party. 'Leaving Europe would threaten our economic and our national security,' Cameron said... 'The choice is in your hands, but my recommendation is clear. I believe that Britain will be safer, stronger, and better off in a reformed European Union."

February 23 - Reuters (Marius Zaharia and Dhara Ranasinghe): "The European Central Bank could run out of government bonds to buy within a year if it does not relax its own restrictions on purchases, dealing a blow to its mission to boost growth in the euro zone and lift inflation. The central bank may have to consider measures such as scrapping its ban on buying bonds yielding less than its deposit rate or even extending the scheme to include corporate debt, particularly if it increases the size of the 60 billion euros ($66bn) a month program... Otherwise it risks running out of the bonds it can buy from some countries, including Germany... The quantitative easing (QE) scheme, launched in March last year, is restricted by several rules aimed at limiting its risks..."

Japan Watch:

February 21 - Reuters (Stanley White): "Growth in Japan's manufacturing activity slowed sharply in February as new export orders contracted at the fastest pace in three years... The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 50.2 in February on a seasonally adjusted basis from a final 52.3 in January."

Geopolitical Watch:

February 23 - Reuters (David Brunnstrom and Arshad Mohammed): "China is 'changing the operational landscape' in the South China Sea by deploying missiles and radar as part of an effort to militarily dominate East Asia, a senior U.S. military official said... China is 'clearly militarizing the South China (Sea),' said Admiral Harry Harris, head of the U.S. Pacific Command, adding: 'You'd have to believe in a flat Earth to think otherwise.' Harris said he believed China's deployment of surface-to-air missiles on Woody Island in the South China Sea's Paracel chain, new radars on Cuarteron Reef in the Spratlys and its building of airstrips were 'actions that are changing in my opinion the operational landscape in the South China Sea.'"

February 23 - Bloomberg (Anthony Capaccio): "The U.S. should deploy a new anti-ship missile made by Lockheed Martin Corp. as quickly as possible to counter improved Chinese and Russian naval capabilities in Asian waters, the top U.S. Pacific commander said. Lockheed's air-launched Long Range Anti-Ship Missile is a 'great capability we need to bring on line fast,' Admiral Harry Harris told the Senate Armed Services Committee... He spoke hours before Secretary of State John Kerry was to meet at the State Department with China's Foreign Minister Wang Yi, as each country has accused the other of escalating military tensions in the western Pacific."

February 23 - Reuters (Idrees Ali): "The head of the U.S. Navy's Pacific Command told a congressional committee... he will carry out more, and more complex, freedom of navigation operations in the South China Sea. 'We will be doing them more, and we'll be doing them with greater complexity in the future and as the Secretary has said, we'll fly, sail and operate wherever international law allows,' Admiral Harry Harris told a House Armed Services Committee hearing, referring to U.S. Defense Secretary Ash Carter. 'We must continue to operate in the South China Sea to demonstrate that that water space and the air above it is international,' Harris reiterated to lawmakers..."