The day ahead is devoid of new headline economic data but several officials from the Federal Reserve will offer their take on the economic recovery, Treasury will auction $32 billion 3-year notes, and Class A MBS Coupons will start the settlement process.

Benchmark Treasuries fell to yesterday's price lows in the overnight hours after making a modest comeback in the afternoon hours of Monday's trading session. Those losses have once again been recouped as U.S. traders get plugged back in, but positive progress does not appear steady.  The 10 year note is currently -2/32 at 91-21 yielding 3.648%.  The FNCL 4.5 MBS coupon is -3/32 at 100-28.

The benchmark S&P 500 reached its highest level since June 2008 on Monday. Analysts at UBS released a note saying they had increased their 2011 target for the index by 7.5% to 1,425. The Dow has gained for the past six days ― the longest streak in three months.  Equity futures are modestly down from the multi-year reached Monday. S&P 500 futures are down 0.50 points at 1,315.75 and Dow futures are 6 points higher at 12,114.. 

Commodity prices are mixed. Light crude oil is trading 0.99% lower at $86.62 while gold prices are 0.27% higher at $1,354.80.

Early this morning, the NFIB Small Business Optimism Index jumped 1.5 points to 94.1 in January ― the highest since the late 2007.

In overseas developments, The Chinese central bank hiked its benchmark one-year lending interest rate by 25 bps to 6.06% in a bid to counter inflation pressures. The deposit rate is now 3%

“The move is weighing on sentiment modestly, with European equities erasing modest gains.” said economists at BMO Capital Markets, who noted that local markets have been closed since Feb. 1 because of the Chinese New Year.

“Expect inflation to tick higher, as policymakers likely wouldn’t be tightening if inflation was cooling,” BMO added. “Look for more interest rate and reserve requirement rate hikes through the first half of this year … Every such action will probably weigh on commodities and global equities, but we don’t believe Chinese growth will slow significantly, so that weakness will likely be temporary.”

Key Events Today:

No significant data.

8:45 ― Jeffrey Lacker, president of the Richmond Fed, speaks on the economic outlook at the University of Delaware in Newark.

10:15 ― The Federal Reserve will purchase an estimated $1.5 billion in Treasury coupons maturing between 8/15/2028 and 11/15/2040

12:30 ― Dennis Lockhart, president of the Atlanta Fed, speaks to the Calhoun Chamber of Commerce in Anniston, Alabama.

1:00 ― Treasury auctions $32 billion 3-year notes

1:30 ― Richard Fisher, president of the Dallas Fed, speaks on the economy to the Stemmons Corridor Business Association in Dallas.

ALERT: Today is Class A Notification Day in the TBA MBS Market