MARKETWATCH: March 21-24, 2011

Safe haven worries that had dominated trading last week have eased so far this week – and investor appetite for greater risk rose a little. The yield on the benchmark 10 year Treasury bond rose from just above 3.25 percent on Monday to over 3.40 percent by close of business Thursday. A greater appetite for risk was indicated by record sales of corporate debt, including high yield debt (sometimes known as "junk bonds").

Still, plenty of concerns linger in the background: to what extent Treasury holdings will need to be liquidated to cover losses and reconstruction costs from Japan’s nuclear crisis (Japanese insurance companies have been the focus); what spillover there will be from the nuclear crisis to the U.S. and global economies; if oil prices will continue to rise as a result of Middle East turmoil, with the most recent focus on Libya; and if there will be effects on the U.S. from a possible new phase of the Eurozone debt crisis, with the Portuguese government falling over its austerity program and Moody’s downgrading many smaller Spanish banks.

The strength and direction of the U.S. economy has taken a back seat to these headline global risk issues, but recent data so far suggests that 1st quarter U.S. growth will be pretty solid, but not stellar. At the same time, some data and global developments have raised concerns about the inflation outlook, although price pressures are expected to be dampened by considerable excess operating capacity in the U.S. economy. The Fed has launched a new round of reverse repurchase operations (known as "reverse repos"), which is a key Fed tool for draining liquidity from the system and is seen as advanced preparation for monetary policy tightening – at some point.

Markets were surprised by the Treasury Department’s announcement that it would start selling its portfolio of agency-guaranteed (i.e. guaranteed by Fannie Mae and Freddie Mac) mortgage-backed securities. Treasury purchased these securities to stabilize the mortgage market at the height of the financial crisis and the value of the portfolio is estimated at around $142 billion. Treasury stated that it would sell around $10 billion a month over the next year, depending on actual market conditions. While there could be effects on the intermediate government securities market from an increase in supply, many expect that the impact will be small.