Market watchers continue to see signs of easing pressure in the intrabank lending market. On Monday, three-month U.S. dollar Libor fell to 4.06% from 4.42% and has now fallen in six straight sessions. Overnight USD Libor also declined and has normalized at 1.51%, just one basis point above the Fed funds rate.

Treasury market participants are also concerned with the growing cost of government bailouts. A report in Monday's New York Times suggests the U.S. government will pay for the rescues by increasing debt, not cutting spending or increasing taxes. On Thursday, the U.S. will hold auctions for two-year and five-year nominal notes and five-year TIPS. The auction sizes have not been announced.

"With Libor fixings easing and the probability of increased credit supply we are expecting rates to move higher this week," said Tom di Galoma, managing director of fixed income at Jefferies & Co.

U.S. two-year yields are up 3.2 bps to 1.65%, with five-year yields up 1.0 bp to 2.84%, 10-year yields up 0.8 bps to 3.94% and 30-year yields up 2.2 bps to 4.35%. The Eurodollar March 09 contract is up 6.0 ticks to 97.84. The yield curve is flatter, with the 10/2-year spread down 1.8 bps to 229.26 bps.

Yields on two-year Canadian government bonds are flat at 2.27%, with five-year yields up 0.5 bps to 2.93%, 10-year yields up 3.7 bps to 3.76% and 30-year yields up 3.8 bps to 4.27%. The December 08 BAX contract is up 10.0 ticks to 97.73.

In Germany, returns on two-year German bonds are down 1.4 bps to 2.94%, with five-year yields down 4.9 bps to 3.53%, 10-year yields down 1.7 bps to 4.00% and 30-year yields down 2.0 bps to 4.50%.

Yields on UK two-year bonds are down 7.9 bps to 3.55%, with five-year yields down 7.1 bps to 4.24%, 10-year yields down 3.2 bps to 4.64% and 30-year yields flat at 4.47%.

Also pushing yields higher are stocks, which are performing well overseas and are expected to rally in North America.

U.S. equity market futures are higher with contracts on the Dow Jones industrial average up 149 points to 8920, the S&P 500 up 17 points to 951 and the Nasdaq up 24 points to 1335.

European stock markets are also higher, with the Eurostoxx up 58 points to 2324, the UK FTSE 100 up 88 points to 4151 and the German DAX up 39 points to 4821.

Asian markets were higher, with the Japanese Nikkei closing up 312 points to 9006 and the Hang Seng Index up 769 points to 15323.

Currency strategists are wary of an unwind in the flight to the U.S. dollar and yen as risk aversion drops. So far, however, there has only been a modest rebound in the pound sterling and Australian dollar. The Canadian dollar remains under pressure with Tuesday's Bank of Canada meeting looming.

The loonie is down 0.0030 to 0.8419 against the U.S. dollar (1.1878 USD/CAD) and down 0.46 to 85.55 against the yen.

The U.S. dollar is down 0.07 to 101.61 against the yen and the Dollar Index is up 0.049 to 82.462.

The euro is up 0.0006 to 1.3415 against the U.S. dollar, up 0.0072 to 1.5933 against the Canadian dollar, down 0.0034 to 0.7727 against the pound sterling and is lower by 0.03 to 136.30 against the yen.

The pound sterling is up 0.0082 to 1.7363 against the U.S. dollar and up 0.0177 to 2.0620 against the Canadian dollar.

WTI crude oil is up $1.03 to $72.88. The front month gold contract at the Chicago Board of Trade is up $8.00 to $796.00 per ounce.

All data taken at 9:02 a.m. EDT.

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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