Morning Interest Rate and Treasuries Report

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March 30th, 2012

The Treasury market has started out trading slightly lower in the wake of positive global equity market action overnight. Some traders feel that Treasury prices might also be trading lower this morning in anticipation of minor gains in US Personal Spending and Income data that is due out later this morning. Treasuries may have produced a less than stellar price reaction to this week’s US supply flow, and that in turn might suggest to some in the market that recent flight to quality support from European peripheral debt anxiety is no longer a “front burner” issue. Global markets have shown little reaction to the violent protests in Spain overnight, which many traders feel should have lifted US Treasuries and applied some pressure to European stock markets. There appears to be a growing consensus that the Fed will use additional stimulus if needed, but the current outlook for the US economy has been marginally positive which has left expectations of near-term action by the Fed at a fairly low level. The official Chinese PMI reading will be released during the overnight session Sunday evening, and a recent pattern of weakening in the Chinese economy suggests that number could come in softer than market expectations. For the time being, Chinese officials may be satisfied to see increased global fears of slowing for their economy and they are likely happy with the recent pattern of weakness in grain and energy prices. Therefore, many in the market are not ruling out the potential for the official Chinese PMI number to be “officially rounded downward”. While Treasuries haven’t been pressured recently because of rising inflationary fears, there is some potential that today’s US grain reports and a soft Chinese PMI figures on Sunday could lead to increasing deflationary expectations. A positive reception to today’s US Personal Spending and Income readings might provide some minimal pressure to Treasury prices. The market will also be presented with a private survey of Chicago-area manufacturing, with expectations for that report calling for an unchanged to minimally weaker reading. There will also be Fed dialogue today from Richmond Fed President Lacker, which could have an impact on prices ahead of the US equity opening.
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