Morning Interest Rate and Treasuries Report

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March 22nd, 2012

U.S. Treasury markets have generally traded higher during the overnight and early morning hours, as prices recovered from last week’s downdraft and are reacting to a round of weak private surveys of Chinese and European manufacturing. The latest data out of China showed a contraction for the fifth month in a row, and may have offered evidence that the rate of contraction has increased. While some traders feel that this sort of report would foster ideas of easier monetary policy by the Chinese central bank, other traders feel that the threat of rising inflation has tempered that viewpoint this morning. As a result, global equity and commodity markets have come under pressure and may be encouraging a flight-to-safety move into US Treasuries. Germans Bunds rallied to a new six-day high during the initial morning hours after a private survey of German manufacturing came in weaker than expected and fell to a new four-month low. What may have been more disappointing to the market was a sharp fall in the new orders component of the survey, which appeared to raise additional doubts over the health of a Euro zone economic recovery. Safe-haven demand in the Treasury market could have increased further after a private survey of Euro zone manufacturing came in under expectations, suggesting that a recent pickup in optimism toward Europe might have been overdone as the data points to contracting growth and has brought recession concerns back into focus. Treasuries rallied yesterday in the wake of the Fed’s purchase of $4 billion in mid-duration Treasuries. Yesterday’s softer than expected US Existing Home Sales data provided additional support by detracting from the improving trend of economic readings that have suggested a stronger US economy. Treasury markets will receive an active flow of US economic data this morning, with the latest reading on Initial Jobless Claims and a private survey of US home prices. There will also be a private survey of US leading economic indicators, which is expected to show improvement from a recovering labor market, 2012 stock market gains and a housing market rebound. A positive reception to this report could become a factor that helps shift the negative tone of outside markets. Additionally, the U.S. Treasury Department will announce the size of next week’s offerings of 2-Year, 5-year and 7-Year Notes and hold a 10-Year TIPS auction around midsession. There are a couple of Fed members speaking during the session, but the market’s focus is likely to remain fixed upon this morning’s US data and whether it confirms the view of a recovering US economy.

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