"Even though interest rates are already near zero, the five-year yield, which is sensitive to the prospects of monetary policy, has declined," Imai said in Tokyo. "That indicates the market has priced in further easing."

The butterfly spread fell to negative 34 basis points, according to data compiled by Bloomberg. A negative number reflects increasing bets that the Fed will cut borrowing costs or hold interest rates near zero for longer, according to Imai.

Speculation that the Fed will announce additional stimulus at a policy meeting tomorrow increased after a report on Aug. 6 showed U.S. employers cut more jobs than forecast in July. Fed Chairman Ben S. Bernanke said on July 21 the economic outlook remains "unusually uncertain" and the central bank remains "prepared to take further policy actions as needed."

The butterfly spread will approach levels last seen in 1981 during the U.S.'s only postwar double-dip recession if it drops below the spread reached after the collapse of hedge fund Long- Term Capital Management LP in 1998, Imai said.

"Even if the U.S. avoids a double-dip, it may suffer protracted low growth of just above 1 percent, which will raise deflation risks," Imai said. "The market is beginning to see the growing possibilities the U.S. will go the way of Japan."

Eoin Treacy's view There has been a great deal of speculation about whether the USA will announce additional quantitative easing measures tomorrow. US Treasury, Gilt, Eurobund and JGB investors have been positioning themselves to reflect an affirmative answer to this question but the situation is far from clear cut. (Also see Comment of the Day on August 4th)

Government bond prices remain in relatively consistent short to medium term uptrends, and all those listed above have posted new recovery highs in the last week. They have all rallied impressively over the last few months and are somewhat overextended relative to their 200-day MAs suggesting that at least some mean reversion is likely.

The US Treasury Butterfly spread [(US 5yr*2) - (US 10yr + US 2yr)] accelerated from April and is now testing the bottom of the 26-year range. It broke to new lows in late July but is quite overextended and probably requires the promise of additional quantitative easing to sustain the current trajectory. Some reversion to the mean appears to be a much more likely scenario. Here is a chart of today's yield curve compared to that of June 2008, when the spread was at the other extreme.

Running concurrently to speculation on additional quantitative easing, commodity prices have been rallying across the industrial and agricultural sectors. This is not particularly consistent with deflation, rather the opposite and makes the prospect of stagflation in the USA an increasing threat. Such a scenario would not be bullish for Treasuries. In the meantime, uptrends for sovereign bond prices remain relatively consistent and they will need to break their progressions of rising reaction lows to lend additional credence to the bearish hypothesis.