Yields have pared an earlier rise ahead of U.S. government bond auctions expected to total $99 billion this week as dealers pared inventory hoping to restock at bargain prices. Central bankers around the world start their regular monthly meetings but despite evidence of a pick-up in global activity, bond investors remain upbeat and see relatively little downside and expect policy makers to remain on the sidelines.

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Eurodollar futures - Bond dealers began the week cheapening up the curve and sold bonds ahead of anticipated supply totaling $99 billion this week. However, the March note has jumped despite an opening rally on Wall Street, which has the ability to sour demand for fixed income bonds. The March future rallied to 120-12 ahead of lunch on Monday carrying a yield of 3.40%. Eurodollar contracts rallied by four basis points across the strip.

Canadian bills - Taking its lead from what's happening to the south of the border, Canadian government bond prices rose 19 ticks in the March future to 120.90 where the yield dipped to 3.31%. Bill prices were firmer with the year-end contract rising a couple of basis points to yield 1.93%. The 10-year spread between U.S. and Canada remains stable at 10 basis points with treasuries costing Washington more than Ottawa.

European bond markets - Yields are lower across Europe despite news that the Irish budget is once again coming back into focus following the news that Prime Minister Brian Cowen is set to step down. Without its passage the nation won't receive a penny of the earlier agreed €85 billion financial aid package. March bunds are clinging onto an earlier gain sending the yield lower by two basis points to 3.15%. PMI data for January was mixed with manufacturing data cooling at the margin across the Eurozone and within Germany too. Service sector PMIs rose.

Japanese bonds - Stock prices around the region largely added to recent gains with the domestic Nikkei 225 index adding 0.7% to start the week. Bond futures eased ahead of Tuesday's Bank of Japan monetary policy meeting with the March contract losing 17 ticks to close yielding 1.223%. 

British gilts - Short sterling prices jumped following a weekend interview with MPC member Adam Posen. He appears to be spearheading the view expressed by most Bank members by arguing that the current stubbornly high reading of inflation is just a temporary phenomenon. He predicts that prices faced by consumers will eventually lurch below the Bank of England's 2% ceiling. However, what will be crucial is whether or not companies will get away with the same argument in light of the reduction in the purchasing power of workers' wages in the meantime. Implied yields on 90-day contracts fell by around seven basis points as dealers pared recently made bets that the central bank would be forced into a rate increase in 2011. March gilts have come off a session high at 117.37 to stand at 117.23 for a net gain of 23 ticks on the session as yields dipped to 3.65%.

Australian bills - Aussie bills fell by a tick despite the smallest rise in prices paid to producers for exactly one year. December producer prices rose by 0.1% falling short of a 0.5% forecast. Government bond prices remained static to yield 5.608%. 

Andrew Wilkinson                                                                    

Senior Market Analyst