European government bonds continued the rally from late Friday as investors, spooked by a further worsening in the US banking and credit crisis, seek safe havens. The news that US investment bank Bear Stearns (nyse: BSC - news - people ) has collapsed and will be bought for 2 usd a share by JP Morgan, with support from the New York Federal Reserve -- the first time the Fed has lent to securities firms since the Great Depression -- has reminded investors that the current crisis can yet get worse.

The Fed's subsequent 25-point cut in its discount rate -- reducing the spread to the Fed funds rate to only 25 basis points from 100 before the crisis began in September -- was little consolation.

'The Fed's weekend announcement of even more generous lending facilities to primary dealers and another inter-meeting cut in the discount rate underlines both the seriousness of the financial crisis and the Fed's determination to pull out all the stops to prevent it from getting any worse,' said Julian Jessop, chief international economist at Global Insight.
The most worrying aspect of the weekend move by the Fed was that it implied that the situation was so bad that the cut in the discount rate could not wait a day until the scheduled meeting on Tuesday, Jessop said.

The market is now pricing in as much as a 50 pct chance of a full 100 basis point cut to 2.0 pct.
'Speculation on the extent of the rate cut will probably dominate (today), especially after the emergency decision taken during the weekend,' said an analyst at BNP Paribas (other-otc: BNPQY.PK - news - people ).
The reaction from credit and stock markets will be the key driving force, although weakness in Asian markets does not bode well for the rest of the European and US trading day, the analyst said.

The Fed rate decision tomorrow is nevertheless not likely to cheer markets much.
'The Fed faces a lose-lose situation as a less than 100-point rate cut will result in market disappointment and an intensification of growth concerns resulting in a dollar and equity market sell-off whilst a 100-point cut could see a limited market reaction as it will be seen as the Fed trying to stay on top of the curve,' said Mitul Kotecha at Calyon.
The data today will likely go mostly unnoticed, with only some US statistics worth any note.

The Empire State manufacturing survey is expected to show a modest improvement in March, whereas the current account deficit should deteriorate somewhat. Meanwhile, the NAHB homebuilders survey is expected to remain downbeat.
In the UK, gilts were also higher across the board, with a lack of any domestic indicators today leaving prices to track the wider market.

Gilts have recently risen more strongly than their European government counterparts because of the strong ties with US financial companies. The UK's economic growth has been heavily reliant on the financial sector in recent years, and the worsening in global credit conditions has kept investors cautious on the UK economic outlook.
At Yield Change on
0940 GMT pct previous close
March euribor future (Liffe) 95.36 dn 0.01
June euribor future (Liffe) 95.76 up 0.11
GERMANY
June bund future (Eurex) 118.40 up 0.57
4.00 pct Jan 2018 govt bond 102.58 3.68 up 0.45
FRANCE
4.25 pct Oct 2017 govt bond 102.89 3.88 up 0.50
ITALY
4.50 pct Feb 2018 govt bond 101.83 4.32 up 0.29
UK
June gilt future 111.90 up 0.47
5.00 pct March 2018 govt bond 105.80 4.28 up 0.35
March short sterling future 94.07 up 0.03
June short sterling future 94.51 up 0.12

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