The federal budget this week has been on everyone’s mind and television set. With the federal government set to shut down tonight at midnight if no budget is passed, markets have been keeping an eye on what is happening here in Washington. Currently, no agreement is in place and signs increasingly point to a government shutdown with agencies and leaders in both parties preparing.

As events continue to develop both at home and abroad -- fiscal, humanitarian and otherwise -- the markets are sending and receiving mixed messages. The world and many economies have been rocked by political unrest, natural disasters, and (in the case of Europe) uncertainties over some countries’ fiscal outlooks. The U.S. government is locked in a fierce budget battle with a shutdown looming, while at the same time new economic data shows that the recovery continues to build momentum -- albeit not as fast as anyone would like.

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").

U.S. Interest Rates:  What is "Normal"? Throughout the week, worried investors once again turned to U.S. Treasury instruments as safe haven investments. This time, investors reacted as fears mounted over the effects of Japan’s nuclear reactor crisis on the Japanese and global economies. Starting the week around 3.40 percent, the yield on the benchmark 10-year Treasury bond dipped below 3.20 percent on Wednesday (the 16th), the lowest point since December.

Markets so far this week have reacted to mixed news on the growth front in the US plus new concerns on inflation. As things start to wind up for the weekend, traders are also nervously watching news from various parts of the world.

While this week’s government bond auctions ($72 billion worth) were digested more easily than expected, yields for the benchmark 10-year bond and 30-year bond rose slightly and were at their highest points since last May.

Markets in the U.S. and elsewhere have focused on signs that the U.S. economy continues to recover, although still at a very gradual pace. January’s payroll employment data and updated benchmarking for 2010 indicate that job creation remains very sluggish, even adjusting for possible weather-related effects which may have held down jobs numbers.

Over the past week, interest rates on the benchmark 10 year Treasury bond rose. Key drivers were: less safe haven demand for US government instruments (a “flight to quality” typically pushes down interest rates) and increased demand for US government instruments with higher yields, based on signs that the US economy is continuing to recover.

Wall Street banks have been drastically cutting their holdings of U.S. Treasuries, according to Bloomberg News. According to most analysts, this is a reaction to expectations of a stronger economy, which is leading banks to invest more heavily in private equities as opposed to Government bonds. While this is certainly good news, it does highlight the risk that U.S.

Nearing the end of the week, markets are still wrestling with the same cross-currents they faced last week, but with a new wrinkle - Spain.

The growth play: With most forecasters sticking to their stronger near-term growth forecasts since the tax cut deal was announced, traders have continued to rebalance portfolios away from bonds and into stocks. Still, growth is not expected to be strong and data has continued to be mixed.