U.S. Treasuries bid well on Friday on weakness of Asian equities as the Nikkei was down 3.7% while domestic equities also closed lower with the Dow down -208.96 to 15,115.57 and the S&P down -23.67 to 1,1630.74. Although USTs performed slightly better, with observation of strong buying of 10s and 30s in Europe, their MBS counterpart traded another volatile session and closed off relatively lower after intraday swings on continued speculation that the Fed will slow bond purchases in the coming months. The wider spread on Friday may also be contributed from higher investor selling coupled with lower than expected buying from index funds with origination supply ending the day weaker at around $2.5 billion.
Overnight consensus remained that after some assets being reallocated to the fixed income side, some investors are still sitting on the sidelines observing what the major players will do next as the markets are still trying to rebalance its remaining positions. On a closing note, the SF Fed sees the current low inflation numbers as only a temporary basis for continuing with QE, but the coming months will remain interesting to see how much more clarity the market and the Fed will be signaling.
Economic headlines/events to watch for today are:
Markit US PMI Final - Survey 52 vs. Actual 52.3
Construction Spending Mom - Survey 0.9%, ISM Manufacturing - Survey 51.0, ISM Prices Paid - Survey 49.8, Revisions to Construction data back to January 2011
UST Buyback in the 2/36 - 5/43 sector ($1.25-$1.75 billion)
*Support is the yield level at which demand is thought to be strong enough to prevent the price from declining further.
**Resistance is the yield level at which selling is thought to be strong enough to prevent the price from rising further.
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