European government bond prices are poised to start higher Monday, after markets traded lower Friday in a session marked by speculation over the future of U.S. investment bank Lehman Brothers.

Investors will look for any comments from European Central Bank chief Jean-Claude Trichet on the massive U.S. financial crisis and how it could affect European business, when he is set speak at 0900 GMT.

The European Central Bank is expecting the euro area’s economy to show a gradual recovery in 2009, ECB Vice President Lucas Papademos told Dow Jones Newswires in an interview Saturday.

On Monday, Treasury prices are well higher amid the Wall Street chaos, after a bounce-back in equities
and dwindling of mortgage-related buying helped knock Treasurys lower Friday, with the long end of the curve the hardest hit.

“Financials in general are still weighing very heavily on people’s minds,” said Adam Brown, director of U.S. government bond trading at Barclays Capital in New York, “and that’s definitely giving the (government bond) market a fear premium, and is the main driver of the curve steepening.”

Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. expects stock markets to weaken, risk premiums on credit to widen and Treasurys to get some bids as the market digests the developments of the weekend.

“I don’t see anything catastrophic,” he said, noting that Lehman’s problems were well-flagged and investors better prepared now than they were in March, when Bear Stearns had to be rescued. The Federal Reserve’s wide array of liquidity facilities should also help ensure that short-term funding markets continue to function, he said.

But given the concern surrounding other financial firms such as Washington Mutual and American International Group, it would be foolish to write off Treasurys just yet.

“It seems like when you remove one piece of systemic risk, the market starts focusing on the next one,” said Derek Brown, a bond fund manager at Los-Angeles-based Transamerica Investment Management

Tuesday, Fed policy makers are widely expected to hold the fedfunds rate at 2%, but interestrate futures traders have started rebuilding bets of a rate cut mby year-end or in early 2009.

“I think the Fed will be forced to lower rates again to help the banks provide liquidity into year-end,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. “It is looking more and more like deflation, not inflation, is the biggest worry.

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