Morning Recap: USTs continued to rally on Monday despite decent gains in equities, as AIG disclosed problems in its credit portfolio and credit continued to widen generally (iTraxx hit record highs at 557, this morning widened to 567 mid). In Tokyo, we resumed trading higher, but street was caught long, anticipating Japanese RM demand which failed to materialize, and the upmove was faded. We are slightly flatter and slightly higher in London. There has been some Japanese RM buying of 10yr SAS paper and Asian CB buyers' of US 5yr. JGBs saw good PAYing in the front end and there was Domestic buying of gamma on belly tail rec'ers, in very decent size. EGBs opened higher, but supplt (Greece tap and Spanish 10yr (bund supply tomorrow)) weighed on Bunds early and Spanish bonds were sold across the curve on FT story (reliance on ECB). We stalled ahead of 117.00 as the rumour mill came back in to full swing with talk ING will write down Eur 6-8 bn, plus talk of large write-down losses at HSBC. Flows in the shorter-end have been mainly RM demand for 1 yr paper, good selling schatz rolls, some liquidations' in Euribor steepeners', buyers' of Gilts vs Bunds after CPI yoy came in at 2.2% vs f/c 2.3%. ZEW did knock the mkt off the highs (rumour -50 out of FX was unreliable as usual) but Schatz remains underpinned by credit woes and talk of a bid-list/structure unwinds in CDS. The Spanish 10yr and Greek 15yr pricing this PM should weigh on Bund prices going into the pricings, but bounce once they've priced- while USTs may likely to see further gains /consolidation in the curve in the long-end of the curve, as distribution of the 30yr auction from last week brings' a better tone in longs' as hedges are lifted. TAF auction today unlikely to affect prices. Mkt will continue to focus on Equities'/monolines'/credit/rumours'.>>> USTs: In Tokyo, we resumed trading higher, but street was caught long, anticipating Japanese RM demand which failed to materialize, and the upmove was faded. We are slightly flatter and slightly higher in London. There has been some Japanese RM buying of 10yr SAS paper and Asian CB buyers' of US 5yr. US TIPS: experienced a subdued session that was once again dictated by the goings on in energy markets rather than in rate space. Front month crude pushed higher by 2% on geopolitical tensions and, per trading desks, a strong technical bid through the $92.70 level. Assuming 100% pass through of just the gasoline move into headline CPI, the mechanical adjustment to the BEI curve is approximately: +5bps in '09s, +2.5bps in '10s, +1.25bps in 12s, + 0.7bps in '18s and +0.4bps in '28s. All else equal, we would expect some of this to reverse given the lack of fundamental drivers for the belly richening. Flows have been light with better RM selling in 20yrs and FM selling in 10s, offset by RM buying in 5s and 10s. JGBs: JGBs saw good PAYing in the front end and there was Domestic buying of gamma on belly tail rec'ers, in very decent size EGBs: EGBs opened higher, but supplt (Greece tap and Spanish 10yr (bund supply tomorrow)) weighed on Bunds early and Spanish bonds were sold across the curve on FT story (reliance on ECB). We stalled ahead of 117.00 as the rumour mill came back in to full swing with talk ING will write down Eur 6-8 bn, plus talk of large write-down losses at HSBC. Flows in the shorter-end have been mainly RM demand for 1 yr paper, good selling schatz rolls, some liquidations' in euribor steepeners', buyers' of Gilts vs Bunds after CPI yoy came in at 2.2% vs f/c 2.3%. ZEW did knock the mkt off the highs (rumour -50 out of FX was unreliable as usual) but Schatz remains underpinned by credit woes and talk of a bid-list/structure unwinds in CDS. The Spanish 10yr and Greek 15yr pricing this PM should weigh on Bund prices going into the pricings, but bounce once they've priced Issuance: - Spain 10yr update: Book closes at 10.00GMT for pricing in PM. Expected Eur 5 bn. Spd fixed at +28 bps vs Bunds. - Update on GGB tap: orderbook now close to 6 yards. Will go subject at 11.00GMT. Allocations and pricing this PM. EUR SUPPLY: 10y Bund auction to be held on 13 Feb. A large amount of cash is being released this week in the market on the back of the â¬14,000 million redemption of the Feb-08 Bobl. However, issuance from the German, Italian and Spanish sovereigns will keep the net issuance positive. Free trial- sales@brokertalk.co.uk