The European debt crisis is back in focus today.

Interest rates are mostly unchanged while equity futures are being pressured lower this morning after Portugal's debt was downgraded again and the country was called out for needing a bail-out.

Moody's said its single-notch downgrade to Baa1 (with a negative outlook) was "driven primarily by increased political, budgetary and economic uncertainty." It was the agency's second downgrade to Portugal in a month, yet Moody's rating is still two notches higher than Standard & Poor's assessment.

Portuguese 10-year bonds were yielding 8.36% on Monday. Markets believe assistance from the EU could be imminent.  "Moody's believes the new government will likely approach the [European Financial Stability Facility] as a matter of urgency," the agency wrote.

Treasuries weakened again overnight, in part owing to a speech from Fed chairman Ben Bernanke, who last night called inflationary issues in the U.S. "transitory." The comment was widely interpreted to mean the Fed chief intended to continue the program of quantitative easing despite more hawkish members at the Fed calling for an early exit of the program.

The benchmark 10-year yield finished Monday two basis points firmer at 3.425% and is currently +5/32 at 3.409%. The FNCL 4.5 MBS coupon is +2/32 at 101-26. S&P 500 futures are 3.50 points lower at 1,325.75 and Dow futures are 18 points lower at 12,319. Light crude is 0.39 at $108.08 per barrel.

The day ahead marks the busiest day of an otherwise barren week.

Key Events Today:

8:25 - Dennis Lockhart, president of the Atlanta Fed, provides welcoming remarks at the bank's Financial Markets Conference in Stone Mountain, Georgia.

10:00 - Economists polled by Thomson Reuters forecast the ISM Non-Manufacturing Index to remain steady at a vigorous 59.7 in March. The index, which measures the services, financial, and construction industries, was previously at its highest level since the summer of 2005. It also shown expansion for 15 straight months and increased its pace for the last six. The important employment component may be ignored given that the nonfarm payrolls report has already come out, but last month it kicked up to 55.6, the strongest since April 2006.
"Various cross-currents suggest that the ISM index for services industries should inch up to 60.0 in March," said analysts at IHS Global Insight. "Business activity remained at solid levels, and freight volumes picked up in the first quarter, while financial market conditions were less buoyant. Orders pulled back slightly."

12:45 - Narayana Kocherlakota, president of the Minneapolis Fed, delivers welcoming remarks at a Minneapolis Fed workshop on homeownership.

1:30 - Charles Plosser, president of the Philadelphia Fed, moderates a panel on weathering the financial crisis at the Atlanta Fed's Financial Markets Conference in Stone Mountain, Georgia.

2:00 - The FOMC Minutes from the March 15 meeting will be closely looked at by Fed watchers, but others should be fine paying attention to the many speakers on the circuit this week. Several of them - Bullard, Fisher, Kocherlakota, Lacker and Plosser - have been musing recently about an early end to QE2 and a mid-2011 hike in the Fed Funds rate, according to economists at BMO Capital MArkets.

"The Minutes will be scoured for any clues to the timing of any potential shift in Fed policy," BMO said.

The last Fed statement kept policy unchanged but revised its language on severa fronts. Economists at Nomura Global Economics pointed out these themes at the most important:
(1) brighter economic outlook;
  (2) more attention to inflation. 

"The more positive language on the labor market 'improving gradually' and the economic recovery being 'on firmer footing' are essentially catching up," Nomura said. 

"The minutes likely entail more detailed discussion on inflation and commodity prices. Moreover, the FOMC kept any discussion of the earthquake/tsunami in Japan, which occurred just 4 days prior to the March meeting, out of the press release; the minutes will almost certainly include some commentary on the potential economic ramifications."