The U.S. debt-market rally yesterday is helping lift global bond markets today. European equity markets are still generally heavy, but the Nikkei rallied 2.5% to its highest level in nearly seven months. Meanwhile the dollar's correction is deepening and additional modest losses are likely today. The dollar has slipped below the 120-yen level, with additional support seen near 119.50-119.60, while the euro could rise toward the $1.0980-$1.10 area.

The combination of the larger-than-expected rise in fourth-quarter U.S. productivity and a commensurate decline in unit labor costs, plus the relatively dovish comments of three

Fed

officials, including

Greenspan

, has prompted a reassessment of the market's view of the trajectory of monetary policy. Essentially the market has further downgraded the likelihood of a Fed tightening. Most market participants had given up ideas that the Fed could tighten later this month following last week's job report. The real impact of yesterday's developments is in expectations for Fed tightening in the second and third quarters. The fed funds futures strip suggests the market ascribes less than a 50% chance of a hike in the second quarter, down from almost 100% confidence in the middle of last week. The market also has downgraded the likelihood of a third-quarter hike from nearly 100% as recently as Monday to less than 75% at yesterday's settlement.

The rally at the long end of the U.S. curve lent support to European bond markets

, which are posting their first advance since last week. The yield on most European bonds are 3-4 basis points lower. The spread between U.S. and German 10-year yields has narrowed almost 30 basis points since Feb. 25, when, at 146 basis points, the spread was the widest in a decade. However, just as important, if not more so, the German (and by extension, the eurozone) yield curve has steepened markedly. The difference between the two- and 10-year yields in Germany is around 100 basis points. This compares to around a 79-basis-point slope a month ago and around a 16-basis-point slope in the U.S.

The U.K. debt market initially sold off in reaction to Chancellor of the Exchequer Brown's budget presentation yesterday. The budget was a bit looser than expected, though most of the benefits appear to be aimed at low-income households. Also of note, the Treasury stuck with its growth forecasts, which are more optimistic than the market consensus and the BOE's forecasts, for that matter. Even if the loosening of the purse strings is a pre-election ploy, some suspect it reduces the chances of further easing by the BOE. Short-sterling futures (similar to the eurodollar futures) are posting modest upticks today after being beaten down yesterday.

European equities are mixed to lower today.

A potential merger of the largest French banks is helping lift financial issues. Oil stocks have been undermined by the International Energy Agency's cut in its forecast for first-quarter demand.

Initially, Japanese government bonds were looking to post a third losing session, but reports suggesting that the

Ministry of Finance

may limit the amount of 10-year bonds to be sold next month (to the same 1.4 trillion yen sold this month) helped reverse those opening losses. The yield on the benchmark government bond slipped 2 basis points to 1.68% from an intrasession high of 1.78%. The preliminary February portfolio flows confirm what the market has suspected: namely, that Japanese institutions continued to repatriate capital ahead of the fiscal year end. If there is a surprise in the report, it is the strength of foreign demand for Japanese assets. Foreigners bought 1.3 trillion yen worth of Japanese bonds in the January-February period and almost 700 billion yen worth of Japanese equities.

Rumors of U.S. Treasury Secretary Rubin's resignation just don't die.

And every time a magazine puts his deputy

Summers

on a cover, policy wonks see it has proof that the succession is being planned. Yet it is beginning to look as if the real personnel changes may take place in Japan and possibly Germany.

The press reports today that

Sakakibara

, dubbed Mr. Yen for his sometimes uncanny ability to influence the foreign exchange market, will leave his post as vice finance minister for international affairs. Talk is that Sakakibara may set up his own think tank. Also, despite the official denial, there still are murmurings the much-criticized German Finance Minister

Lafontaine

may be nominated as EC president. Such a move may come, though, only if the government fares poorly in this year's state elections and in the June election of the European Parliament.

Mexico continues to record a simply stellar performance.

Its equity market, up 16% in dollar terms, is among the best performers this year. Short-term interest rates fell yesterday to their lowest level in seven months. At yesterday's auction, the yield on the benchmark 28-day cetes (T-bills) fell 239 basis points to 24.39%. The decline in yield was about twice what had been expected and the demand was about twice that seen at recent auctions. Inflation is also falling faster than expected. Yesterday the government reported that prices rose 1.34% in February, less than the market consensus forecast, and the slowest price increase in six months. For its part, the peso is consolidating near 11-week highs. Mexico remains attractive, but the risk is that some profit-taking is seen ahead of the end of the Ecuador bank holiday -- now scheduled for Friday -- when a full-blown crisis is expected to unfold.

Lastly, note that for the umpteenth time, Chinese officials have denied reports that it is planning on devaluing the yuan or renminbi. No surprise here. But what is setting the chins wagging is a press report quoting the deputy director of a gold research center as recommending that China triple its gold reserves to diminish the reliance on the dollar and to avoid the vagaries of the yen and uncertainties surrounding the euro. Color me skeptical.

Marc Chandler is an independent global markets strategist who writes daily for TheStreet.com. At the time of publication, he held some U.S. bonds and some mutual funds with positions in Europe, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

commentarymail@thestreet.com.