Treasurys Rally After Bear Stearns Deal

On Tuesday the central bank will hold a monetary policy meeting. Given the Fed's obvious willingness to step in on behalf of the markets, investors are confident the central bank will implement a large reduction in the overnight federal funds rate, which now stands at 3 percent.

Fed funds contracts on Monday showed that many investors expect a rate cut of one full percentage point, and a few even are placing bets on a massive 1.25 point reduction.

New data reports Monday pointed up the weakness in the economy. The New York Fed said local factory activity this month has fallen to a record low; the Empire State Manufacturing index had a reading of negative 22.2, down from negative 11.7 in February.

Meanwhile, the Federal Reserve said nationwide industrial production, which comprises production at factories, mines and utilities, dropped 0.5 percent in February, marking the first decrease in four months.