Credit Re-Crunching

The Treasury plans to auction a total $78 billion in 3- and 10-year notes, and 30-year bonds. In the past week as investors rushed to the safety of Treasurys, the 10-year yield moved sharply lower and broke below its recent range, of about 3.50 to 4 percent. On Friday, it touch 3.27 percent. "Now it looks like the range is going to be 3.25 or 3.30 to 3.75 in 10-year notes," said David Ader, chief Treasury strategist at CRT Capital.

"You take a look at what's happening now in spreads, Libor OIS, credit spreads are moving out...That was a big trade for people, and now they are going to start lightening up in that and that is going to provide a bid to Treasurys," Ader said. Spreads on everything from corporate to high-yield to mortgages all moved wider in the past week, sending a shudder through the equities market.

"What happened in the stock market is you have to sell..this is like 'get me out of risk assets' and the most liquid risk asset you can sell is a major stock index and that's the proxy," he said.

One of the big factors behind the market's sell off was the ripple effect from the Greek debt crisis on banks. There have been whispers of worry about European banks, which hold large amounts of European sovereign debt. As contagion fears spread among the euro zone's weakest members - Italy, Spain and Portugal - sovereign spreads widened and the fears about banks snowballed.

Knapp said he's watches the spreads on euro versus dollar cross currency swaps and in the past week they moved sharply lower.. "It underscores that there's a shortage of dollar-based financing for European banks. To me, that's how it washes to shore, so to speak," he said.

Analysts say U.S. banks have limited direct exposure to southern European sovereign debt, but the big unknown is what their counter party exposure might be to Europe's banks. For that reason, many on Wall Street likened the market events this week to shades of Lehman.

"The amount of currency swaps and interest rate swaps between U.S and European banks has to be humungous," said one credit expert.

Knapp said he's also watching the progress of financial regulatory reform because of its potential impact on banks. He said the "too big to fail" provision could result in higher short term borrowing costs for banks since Moody's and Standard and Poor's could cut their credit ratings.

What Else to Watch

Fed Chairman Ben Bernanke speaks in Philadelphia Thursday at 12:30 pm on community development. Fed Vice Chairman Donald Kohn speaks on monetary policy and lender of last resort in Ottawa that day, and Dallas Fed President Richard Fisher speaks at 1:15 in Odessa, Texas that day.

Other Fed speakers include Minneapolis Fed President Narayana Kocherlakota who speaks Monday on taxing risk in Minneapolis, and Atlanta Fed President Dennis Lockhart speaks in Atlanta Tuesday on the financial system after the crisis. Chicago Fed President Charles Evans speaks on Friday afternoon in Bloomington,Ill.

Companies reporting earnings include Dish Networks, Tyson Foods, Dean Foods and Priceline.com, all on Monday. Tuesday's reports include Disney and Toyota. Allianz, Macy's and Cisco report Wednesday. Kohl's, Urban Outfitters, Nordstrom and Nvidia report Thursday, and JCPenney reports Friday.

- Reuters contributed to this report.

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