1. FED

1) Mortgage Bonds Show Limits to Fed’s Rate Twist: Credit Markets

The bond market is signaling interest rates on new U.S. home loans may struggle to fall further after reaching record lows in response to the Federal Reserve’s decision to buy more government-backed mortgage debt.

Investors pulled back from the securities after the central bank’s statement sparked a rally that reduced yields on the types of debt it will likely buy to the lowest ever relative to some benchmarks. Loan rates also rose at the end of last week as U.S. Treasury yields climbed on speculation Group of 20 leaders would contain Europe’s debt crisis.

Analyst Comment: The lowest-coupon mortgage bonds got stupid expensive. People front-ran the Fed, and now they’re paying the price.

2. Euro zone Crises

1) Euro Rises on Optimism EU May Speed Fund to Stem Debt Crisis

The euro rose on optimism European officials may speed efforts to stem the region’s debt crisis after mounting pressure from foreign counterparts and investors at the International Monetary Fund’s annual meeting.

European governments are exploring accelerating the start of a permanent rescue fund for their economies, with senior finance officials set to examine this week the cost advantages of setting up the European Stability Mechanism, or ESM, a year earlier than its July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News. Faster ESM enactment would provide a “more effective financing structure” and “this gain is to be considered as a minimum.”

2) Europe Faces Geithner, Soros Pressure to Defuse Debt Crisis

U.S. Treasury Secretary Timothy F. Geithner set the tone at the annual meeting of the International Monetary Fund in Washington by warning that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.”

Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

“The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence,” People’s Bank of China Governor Zhou Xiaochuan said at the IMF talks.

Such calls leave European policy makers under pressure to further boost the ammunition of their regional rescue fund even as parliaments focus on ratifying a July plan to broaden its powers.

3) Greece’s Venizelos Vows ‘Whatever It Takes’ to Solve Crisis

Greek Finance Minister Evangelos Venizelos said his country will do “whatever it takes” to meet its budget goals and cautioned against making it a “scapegoat” for global economic woes.

Greece has yet to secure a second international bailout amid questions about whether it can satisfy the terms for aid. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December. Analysts at JPMorgan Chase & Co. predict the euro area will start contracting in the fourth quarter and that the European Central Bank will cut interest rates next month.

4) Banks Splinter on Euro Debt Crisis as Tension Pervades Meetings

Wall Street leaders, urging coordinated action from world governments to solve the European sovereign-debt crisis, struggled themselves during four days of meetings in Washington to agree on what’s needed to end it.

“It was a big group there, they’re going to differ about stuff; there’s a lot of tension in the air because of the world we live in,” Morgan Stanley Chief Executive Officer James Gorman. “There’s no one solution. It’s going to be 25 different things.”

5) Merkel Says Greece Needs ‘Barrier’ Erected to Stave Off Default

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

Expanding the powers of the region’s rescue fund, the European Financial Stability Facility, as agreed by European leaders in July is necessary to avoid Greece’s problems from spilling over to other countries, Merkel said late yesterday on ARD television.

6) ECB May Take More Steps If Outlook Worse, Estonia’s Kaasik Says

The European Central Bank may take further steps to support the region’s economy, including cutting interest rates, if the economic outlook worsens, Estonia’s Deputy Central Bank Governor Ulo Kaasik said.

Kaasik’s remarks follow indications by ECB Governing Council members Ewald Nowotny and Luc Coene in the past few days that the central bank could step up efforts to boost growth and ease financial-market tensions as early as next month. The latest ECB growth forecasts that came out Sept. 8 were made in August when not all information was available to gauge the strength of European growth, Kaasik said. Nowotny today suggested he expects further downward revisions.

3. Central Banks

1) Philippines May Hold Interest Rates Rest of Year, Tetangco Says

The Philippine central bank will probably refrain from changing interest rates for the rest of 2011 even as government spending may boost economic growth in the second half, Governor Amando Tetangco said.

“Inflation is not going to accelerate,” Tetangco said. “There is a possibility and we are looking at that for the rest of the year” to keep rates on hold, he said.

Europe’s worsening debt crisis and a faltering U.S. recovery have raised the danger to growth in Asia, prompting central banks from South Korea to Indonesia to refrain from interest-rate increases this month.

4. ECO

1) World Finance Chiefs' Patience Ebbing as Pimco Sees Stagnation

There will be little to no economic growth in industrial nations during the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, Emerging economies will maintain faster growth, albeit not as high as the last 12 months, said Mohamed El-Erian, chief executive officer of Newport Beach, California- based Pimco. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next.

Such gloomy sentiment dominated weekend talks of policy makers, investors and bankers in Washington, where the International Monetary Fund and World Bank held their annual meetings.

2) Australia ‘Rock Solid’ Amid Europe Debt Crisis, Swan Says

Australia is facing the current global economic turmoil from a position of strength, with low unemployment, a strong banking system and a big investment pipeline, Treasurer Wayne Swan said.