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Markets are calm as investors and speculators await fresh trading incentives.

Japanese bonds rallied, but the equity market failed to follow suit following disappointing earnings from



, Japan's largest manufacturer of copiers and automated office equipment. European bonds are higher, while stocks are struggling to hold on to their early gains. The dollar is mostly steady, though it appears a bit vulnerable against the yen and euro.

News that the government may alter its bond issuance schedule to ease supply worries helped extend yesterday's Japanese bond rally.

The yield on the Japanese benchmark bond fell 18 basis points to slip back below 2% for the first time since Jan. 29, marking the third largest gain in Japanese bonds in five months.

Finance Minister


suggested that the government is considering funding a larger part of the coming stimulus through short-term debt instruments, rather than rely as heavily on longer-dated paper. Press reports indicated the government was considering issuing more four- and six-year bonds and fewer 10-year bonds. However, Miyazawa did not lend much credibility to the stories and indicated that there is no change in plans to sell 1.8 trillion yen in 10-year bonds per month during the next fiscal year.

Apparently officials are still considering increasing the size of Japan's rinban operations (in which the


purchases bonds from the market, like the

Federal Reserve

does in a coupon pass). Currently, the BOJ buys about 200 billion yen of bonds twice a month from the market. In the past a sharp increase in rinban operations has coincided with weakness in the yen.

The market also awaits the announcement from the

Financial Reconstruction Commission

, which is expected to announce in the coming days the terms of the government's aid to top banks ahead of the end of March as part of the recapitalization plans. Large Japanese banks have requested 6 trillion yen ($53 billion), which will likely be provided through government purchases of subordinated debt or preferred shares.

Lastly, Japan reported a 0.6% year-on-year decline in household spending, the 13th such decline in the past 14 months. The market had expected a flat number.

Germany reported an unexpected decline in unemployment in January.

The unemployment rate slipped to 10.6%, down from a revised 10.7% in December to stand at its lowest rate in two years. The jobless tolls fell 59,000 to 4.09 million. The consensus had called for an unchanged unemployment rate and a small rise in the number of unemployed. Nevertheless, the stronger-than-expected data failed to provide the market much relief from worries about the pace of the economic slowdown in Europe. In fact German yields have slipped lower today, as have most European bond yields. The president of the German Labor Office warned that mild weather may have been behind the unexpected fall in unemployment and that it may prove only temporary.

The spread between German and U.S. 10-year yields narrowed to around 115 basis points from 122 basis points last week, which represents the widest spread this decade. The spread could narrow toward 108-110 basis points in the coming days.

The backup in U.S. yields will likely ensure a good reception to the Treasury's quarterly refunding

, which begins today. The large budget surplus projected for this year means that the U.S. will continue to pay down its debt and thereby reduce the supply of new issues or on-the-run securities. The reduction of supply should help underpin the U.S. debt market just as the increase in supply weighs on the Japanese bond market.

The March U.S. bond held key support near 124 despite several tests in recent days. Stops are likely being stacked up below this area and a healthy rise in fourth-quarter productivity, to be reported later today, may help bonds distance themselves from this area. Look for the bonds to rally after the quarterly refunding is over on Thursday. The initial target is near 126.

After stronger performances in recent sessions, the Australian, New Zealand and Canadian dollars are falling victim to profit-taking

. Softer commodity prices may be providing the excuse. Underlying sentiment remains positive and the pullback is seen as a healthy technical development.

The Australian dollar could slip toward 0.6425-0.6450 to the U.S. dollar before finding new buying interest. Similar support for the New Zealand dollar is in the 0.5500-0.5540 band. Corrective forces could lift the U.S. dollar toward C$1.50.

Despite the U.S. dollar's firmer tone within the dollar bloc, the risks are increasing for a modest pullback against the other major currencies.

There are negative divergences appearing on some momentum indicators for the dollar against the Swiss franc and German mark. The greenback has scope to slip into the 1.7220-1.7240 area against the mark and 1.4070-1.4100 against the Swiss franc. In terms of the euro, this implies a rise toward the $1.1340-1.1380 area.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to