Euro debt: two-year yields at historic lows
Two-year euro zone government bond yields hit fresh record lows and Bund futures new contract highs as geopolitical tensions over Iraq and North Korea further reinforced the allure of safe haven fixed-income assets.

North Korea test-fired a cruise missile on Monday into the Sea of Japan in a bid for nuclear negotiations with the United States, raising tensions at the same time as the United Nations prepares this week to vote on a second resolution to authorise war with Iraq.

Speculation has grown that following the completion of a build-up of U.S. and British allied forces in the Gulf, military engagement could begin within the next two weeks.

"Everyone is waiting for war to break with Iraq and worrying about Korea as the next big world challenge, and that's pushing yields lower as are continued hopes of more interest rate cuts in Europe after last week's move," said a trader in Helsinki.

At 0830 GMT, the interest-rate sensitive two-year Schatz yield was down 2.9 basis points at 2.211 percent and near record lows hit earlier at 2.204 percent. Iraq war jitters boosted the euro to around four-year highs against the dollar, further boosting euro-denominated debt, as did weaker euro zone bourses. The June Bund future was up 27 ticks at 116.69, around contract highs at 116.70 hit earlier, while benchmark 10-year Bunds yields struck two-week lows at 3.89 percent, down three basis points.

"(We have) a strong uptrend after testing the top of the channel at 116.60/70, said David Sneddon, technical analyst at Credit Suisse First Boston in London.

"We should now get some correction after failing that resistance and expect sideways trading.

More rate cuts Weak U.S. jobs data boosted expectations for Federal Reserve interest rate cuts -- sending U.S. interest rate futures to contract highs on Friday and two-year Treasury yields to to record lows.

Meanwhile, euro zone interest rate futures remained resilient on Monday after sagging in the wake of the European Central Bank's decision on Thursday to cut rates by 25 bps to 2.50 percent, confounding hopes of a half-percentage point cut.

While March Euribor futures, which indicate euro zone rate expectations, were unchanged at 97.505, near a two-week low and signalling short-term interest rates at 2.49 percent, more liquid June Euribor futures were at 97.760, up 0.015 on the day and implying rates at 2.24 percent.

Money markets are pricing in around a 70 percent chance that the ECB will have to cut rates by another 25-bps in the near term, and a 40 percent chance of a 50-bps cut.

ECB board member Tommaso Padoa Schioppa said in an interview that the bank had debated for a long time last week whether to cut rates before its March 6 meeting.

He said that cutting rates by a more generous 50 basis points would not have had much effect "mainly because Europe's economic problems don't have much to do with monetary policy."

International Monetary Fund Managing Director Horst Koehler stoked hopes of more monetary policy largesse on Sunday when he said the world's major economies still had scope for rate easing if necessary and he said he did not expect a global economic recession. No significant euro zone data is scheduled this session. Markets in euro zone member Greece were closed for a public holiday.

Bunds outperformed Treasuries, the 10-year yield moved four basis points on the day leaving T-note yields 13 bps below those of Bunds.

The 10-year euro swap spread was unchanged at 17 bps since Friday.

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