Stocks rallied around the globe in overnight trading and interest rates suffered in the process. 

The NIKKEI closed 1.22% higher. The Shanghai Composite improved 0.47%. In Germany the Dax is currently 0.29% better while the FTSE in London is 0.13% worse. Meanwhile domestic stock futures are pointing upward. S&Ps are +3.50 at 1329.50 and Dow futures are +25 at 12239.

Stocks in London moved into the red after news flashed that Saudi Arabia was sending tanks to Bahrain ahead of the latest pro-democracy demonstrations.  Analysts have been wondering if Saudi planned to intervene, and these reports - if accurate - suggest it does. The real concern for the West is if the unrest spreads to Saudi itself. READ MORE

Reuters reports U.S. Secretary of State Hillary Clinton accused Libyan leader Muammar Gaddafi on Monday of using "mercenaries and thugs" to suppress a popular uprising as world leaders sought new ways to isolate and oust him. "We have seen Colonel Gaddafi's security forces open fire on peaceful protesters. They have used heavy weapons on unarmed civilians. Mercenaries and thugs have been turned loose to attack demonstrators," Clinton said. "Through their actions, they have lost the legitimacy to govern. And the people of Libya have made themselves clear: It is time for Gaddafi to go -- now, without further violence or delay," she told the U.N. Human Rights Council in Geneva. FULL REUTERS RECAP

As stocks rallied overnight, interest rates moved higher and the yield curve steepened.  The benchmark 10-year Treasury note is currently -13/32 at 101-10 yielding 3.468% (+4.6bps) and the 2s/10s curve is 3bps steeper at 276bps wide. The FNCL 4.5 MBS coupon is -7/32 at 101-21. A cluster of support is seen around 3.46-3.48% for the 10 year TSY note.

Bloomberg reports that China, America’s largest creditor, increased its holdings of U.S. debt to a record $1.175 trillion in October, according to revised data issued by the Treasury. The nation’s investment totaled $1.16 trillion at year-end, the Treasury Department reported yesterday, raising the figure from the previous $891.6 billion. Japan maintained its place as America’s second-largest lender, with $882.3 billion of Treasuries at year-end, compared with $883.6 billion before the revision.

Also in the news, Reuters called attention to rising input prices at factories around the world.  (Reuters) - Factory input costs leapt across the globe in February, the latest sign of rising inflationary pressures, while euro zone manufacturing grew at its fastest in nearly 10 years, surveys showed on Tuesday. British manufacturing also grew strongly, at its fastest pace in nearly two decades, and Indian factory growth accelerated. But in China, where the authorities have raised rates and bank reserve requirements multiple times since last year, factory growth slipped to its slowest pace in six months.

These observations fit well with our call for a margin squeeze in 2011. Look for rising input prices in today's ISM Manufacturing Index, which will be released at 10am.

Key Events in the Day Ahead...

10:00 - Fed Chairman Ben Bernanke will share his semi-annual Humphrey Hawkins testimony with the Senate Banking Committee today. Tomorrow he will offer an encore performance before the House Financial Services Committee.  Bernanke will update us on the status of the economy and the expected impact of the Fed's expansionary monetary policy efforts, including QEII. Ben is not expected to shift far from recent Fed rhetoric. The economy is growing but not at a pace fast enough to reduce the unemployment rate on a consistent basis. He will likely point toward rising commodity prices as a source of short-term inflationary pressures but continue to say that core inflationary expectations remain well-grounded in the U.S. because of weak wage growth, a stagnate housing market, and insufficient job creation.  It is unlikely that Bernanke will hint at an early end to the Fed's latest Quantitative Easing efforts. READ MORE ABOUT THE FED'S OUTLOOK

10:00 - February's ISM Manufacturing Index is expected to tick up to 61.0 from 60.8. Both the manufacturing and service sector PMIs have been in an extended uptrend for most of the past year. Regional manufacturing surveys for February remained on solid footing with increases from January and leaves the impression that the ISM has room for some more upside. However, a marginal extension in the ISM will not be nearly as impressive after January saw pullbacks in most regional Fed surveys while the ISM powered ahead.

10:00 - January Construction Spending should come in with a decline to 0.4 percent from a bigger fall of 2.5. The weather is seen as a factor weighing on the result, which if unrevised would be the third consecutive fall.  January employment data for construction showed that weather could have been a negative factor, but regardless soft employment data still highlights that there is not much room for upside in construction activity.

10:00 - Treasury Secretary Timothy Geithner is scheduled to testify before the House Financial Services Committee on the Obama administration's efforts to reduce the government's role in the $10.6 trillion U.S. mortgage market. “Mortgage Finance Reform: An Examination of the Obama Administration’s Report to Congress”

2:00 - HUD Secretary Shaun Donovan testifies before the House Financial Services Committee on "Oversight of the Department of Housing and Urban Development (HUD)"

Also on the calendar....

(Reuters) - Major automakers are set to report auto sales data for February on Tuesday. U.S. auto sales are expected to show a gain of about 20 percent from the still-depressed levels of a year earlier in February, but the recent rise in oil prices could slow or even derail the industry's recovery, analysts and industry executives say. The sales results represent one of the first snapshots of U.S. consumer demand, and the February data are expected to show steady demand without evidence of the kind of accelerating turnaround that some analysts had forecast. For the fifth consecutive month, the annualized sales rate is expected to hold above 12 million vehicles in February.