The Day Ahead: Treasury Auction and Ben Bernanke

Rate sheets seem set to weaken once again as benchmark Treasuries get off to another slow start and MBS prices follow the leader into lower price territory. A bounce in stock futures is leading money out of bonds.

The 10-year Treasury note is 10/32 lower in price and 3.5bps higher in yield at 3.031%% and the Fannie Mae 30-year 4.0 MBS coupon is -7/32 at 100-27.  This behavior is similar to what we witnessed yesterday morning before a modest reversal played out in the afternoon hours as declining stock indexes sparked a reallocation of funds into risk-free assets.

Stock futures are off those afternoon lows after more than five weeks of declines. S&P 500 futures are 6 points higher at 1,291 and Dow futures are 68 points up at 12,126.  Positive Euro data included German factory orders, which jumped 2.8% in April and March figures were revised up to +1.3%. Also, Eurozone retail sales climbed 0.9% in April, versus forecasts for a 0.3% jump. The year to year gain is now +1.1%.

Light crude oil remains under the $100 mark at $98.48 per barrel, 0.55% down from Monday. Gold prices are 0.05% higher at $1,547.90.

Much like Monday, Tuesday offers no economic reports worth mentioning. Some might say Same Store Sales at 7:45am, Redbook at 8:55am or Consumer Credit at 3pm are worth a passing glance, but they're not on our main screen radar. Instead we'll be focused on the first of three Treasury auctions scheduled for the week ahead. The federal fundraising process gets underway with $32-billion 3-year notes, results will be announced shortly after 1pm eastern. Although we'd expect Wednesday's $21-billion 10-year note issue to carry more influence over mortgage rates, we can't overlook any auction. If MBS and ultimately, rate sheets, hope to revisit record setting levels, strong demand for all U.S. debt must be exhibited by bond investors. The day is unlikely to end with little fanfare as Fed Chairman Ben Bernanke will take center-stage at the International Monetary Conference in Atlanta at 3:45pm eastern. Because his topic of discussion is "to be announced", we'll be paying close attention for any updates Bernanke shares on monetary policy (QEIII) and the FOMC's economic outlook. While this event takes place in after hours trading, the Fed Chairman always carries enough clout to move the markets.

Key Events Today:

12:30 - Dennis Lockhart, president of the Atlanta Fed, speaks on the economic outlook to the Charlotte Economic Club, in North Carolina.

3:00 - Consumer Credit is anticipated to continue growing for the seventh consecutive month in April, following a series of crushing declines during the financial crisis. The consensus of economists look for a $5 billion expansion, compared with $6 billion and $7.6 billion gains in the prior two months. Forecasts range from $2 billion to $6 billion.

The March report was notable for its $1.9 billion increase in revolving credit - mainly credit cards - which marked just the second gain of the past 31 months, according to Nomura Global Economics.

"It appears that credit card volumes have likely bottomed, but given the increasingly conservative financial outlook of the average consumer and aging population demographics, we would expect any increase in credit outstanding to be limited to at most 75 - 80% of income growth," said economists at Janney Capital Markets. "That's the only way consumers will be able to reduce balance sheet leverage over time, and even that upper limit indicates a slow rate of leverage reductions."

According to IHS Global Insight, total consumer debt stood at $2.45 trillion in April, the same level as a year ago.

"The peak to trough loss in consumer credit between July 2008 and September 2010 was $187.0 billion," Global Insight noted last month. "Since then, consumer credit has rebounded $36.6 billion, or about 16% of the total loss. This is good news as it indicates that positive labor market developments and improving incomes are driving up consumer spending."

Janney notes that while financing incentives have tightened, a higher volume of auto sales should generate growth in consumer credit volumes.

"Consumer credit growth has resumed, reflecting an end to banks' hesitancy to lend and ... somewhat reduced consumer hesitancy to borrow," said analysts at Janney Capital Markets. "Even so, it appears that this improved demand for borrowing has been concentrated predominately in a single sector, namely auto lending." 

3:45 - Fed Chairman Ben Bernanke speaks. 

"This is his first major speech on the economy since the March 1st Monetary Policy Report to Congress," BMO noted. "A lot has happened since then, and very little has been good. He will likely acknowledge the economy's slowdown but affirm that a moderate recovery remains on track. While downplaying the chance of more QE, he should reaffirm that rates are likely to stay low for an extended period."

Treasury Auctions:
1:00 - 3-Year Notes