U.S. government debt prices faced a rough ride on Monday morning following a warning from Standard & Poor's that the outlook was negative rather than stable for the credit-worthiness of its multiple trillions of dollars-worth of debt. Bonds had been sharply higher ahead of the ratings agency's report in response to intense pressure on peripheral European government's debt, whose price declines accelerated in to the late European afternoon on worries over a restructuring of Greek bonds.

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Eurodollar futures -The fact that the U.S. deficit is heading to hell in a hand-basket shouldn't be a surprise to anyone, although the S&P news shook the bond market to its foundations even if only for 30-minutes or so. The yield on the 10-year treasury note future expiring in June was three pips softer earlier as a slide in stock index futures drove up the bid for the safety of government debt. But the warning from S&P drove the fixed-income market abruptly into reverse. It said that there "is a material risk that U.S. policy-makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013." June notes took about an hour to digest what is seen by some as an acceleration of the debate over the nation's poor fiscal health with the contract gaining as benchmark stock indices plunged. Cash yields added a couple of basis points to 3.42% as investors were prompted to add a risk premium to owning bonds of the world's largest economy.

European bond markets - It's all getting rather messy in Europe where pressures are further-mounting on bonds issued by peripheral governments. Not in the single currency's 13-year history have bond yields been as high as they reached Monday, not something any of the individual nations signed up for when joining the one-size-fits-all currency-zone. Greek two-year debt yielded 20% and above as selling picked up on Monday. Over the weekend a Finnish election saw political divisions rise across the nation with the anti-European True Finns party picking up more voters leaving them breathing down the neck of the pro-European National Coalition party. Investors always knew that the sovereign debt issue would be difficult to quell but now the threat that Finland could strike to block the EU's bailout mechanism is stoking the fire beneath the bond market debate. German bund futures expiring in June surged by more than a full point to 122.30 driving the yield on the 10-year down by 11 pips to 3.26%. The short end of the market is also overlooking the various warnings from ECB officials over the weekend. Most refuted President Trichet's earlier warning that the initial rate increase would not necessarily be the first of a series by warnings that monetary accommodation remains excessive and that even food and energy price increases can't be overlooked. Euribor futures are sharply higher by way of telling the central bank that the type of inflation they remain fixated on will be the last of their enemies if the wheels fall of the Eurowagon.

Japanese bonds - Government bond prices made headway as thoughts of a slowdown in global demand spurred demand for the safety of government bonds. The June 10-year JGB future added 36 ticks to 139.48 sending the yield lower by three pips to 1.25%.

British gilts - The British yield curved continued the flattening process that started in the aftermath of weaker than expected inflationary pressures last week. The short end of the market made gains of five basis points while further short sterling expirations gained by three-times as much. Gilt futures expiring in June rose by 35 basis points sending the 10-year yield lower by three pips to 3.56%. Consultant Ernst and Young dulled their prediction for 2011 growth by half of one percent claiming that this supported an unchanged base rate outlook at the Bank of England.

Canadian bills - Ninety-day bills of acceptance rallied along with other global short-ends. The Bank of Canada is clearly toying with the notion of tightening monetary policy, but remains encumbered by a firm domestic currency. The threat of a dramatic slowdown in global growth on account of a European implosion is naturally gnawing away at their bias. Government bond yields slumped by five basis points on safety grounds as U.S. yields edged higher. Canada has one of the nicer budget stories as the globe emerges from recession and intends to be the first G7 nation to balance its books within four years. The June future surged by 62 ticks to 121.10 as yields eased while 90-day futures gained by six basis points.

Australian bills - Weakness in Asian stocks dampened recent enthusiasm for higher-yielding assets and raising worries in the credit markets that global growth might slow. Adding to concerns was a weekend increase from the Peoples Bank of China in the reserve requirements it sets across the banking system. The Governor warned that monetary tightening might go on for some time to come. Short-dated bills of acceptance rose by six basis points as investors reduced expectations for a rate increase in coming months and lowering implied yields. Bond prices rose sending the benchmark yield on government data lower by five basis points to 5.52%.

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