Fueling the bullish bets in bonds were expectations of a reduction in supply after the Treasury Department trimmed its borrowing estimates for the current quarter by more than half, to $142 billion, citing higher receipts and lower outlays. The Treasury will announce the size of its May refunding on Wednesday. Analysts predict the refunding size might be reduced by up to $3 billion based on the Treasury's latest borrowing projection. The prior quarterly refunding totaled $72 billion. While the backdrop for bonds remains bullish, the market appears overbought in the near term and faces risk of selling pressure from investors and primary dealers who will clear space for next's refunding supply, analysts said. "The most likely event into next week is consolidation," said Larry Dyer, head of U.S. rates strategist at HSBC Securities USA in New York.

Treasuries, MBS, and stocks are all moderately weaker after Factory Orders data hinting at a preference for technically motivated range trades rather than the significance of the data. 10yr notes rose to their highest levels of the morning at 3.269. FNCL 4.5's fell a short distance within their range (which has been exceedingly narrow) to 102-28+, effectively unchanged on the day. S&P's are also in a tight range and are just slightly weaker on the day at 1359.18. There's no more scheduled economic data today. Volume continues to be underwhelming.

* U.S. MARCH FACTORY ORDERS +3.0 PCT (CONSENSUS +1.9 PCT) VS FEB +0.7 PCT (PREV -0.1 PCT) * U.S. MARCH DURABLES ORDERS REVISED TO +2.9 PCT FROM +2.5 PCT * U.S. MARCH NONDEFENSE CAP ORDERS EX-AIRCRAFT REVISED TO +4.1 PCT FROM +3.7 PCT * U.S. MARCH FACTORY ORDERS EX-TRANSPORTATION +2.6 PCT VS FEB +0.6 PCT (PREV +0.1 PCT) * U.S. MARCH FACTORY ORDERS EX-DEFENSE +3.0 PCT VS FEB +1.3 PCT * U.S. MARCH NONDURABLES ORDERS +3.1 PCT VS FEB +0.5 PCT * U.S. MARCH COMPUTERS/ELECTRONIC PRODUCTS ORDERS -0.8 PCT VS FEB +0.1 PCT * U.S. MARCH TOTAL MANUFACTURING INVENTORIES +1.1 PCT VS FEB +1.0 PCT * U.S. MARCH INVENTORIES/SHIPMENTS RATIO 1.24 MONTHS' WORTH VS FEB 1.26 MONTHS

(Reuters) - The European Central Bank will signal its readiness to raise interest rates when it meets on Thursday and may use its 'strong vigilance' code words to signal a rise as soon as June. The Frankfurt-based bank raised euro zone rates by a quarter of a percentage point to 1.25 percent last month, ending almost two years of record-low interest rates and beginning what economists expect to be a run of increases. Just when the next rise comes will be the key issue on Thursday, with attention focused on the wording ECB President Jean-Claude Trichet uses in the opening paragraph of his post-meeting statement. "We think it's June," said RBS economist Nick Matthews. "If we're correct in that, we would expect President Trichet to use the wording 'strong vigilance' on Thursday to signal that." Trichet said precisely that in March to flag April's rate rise, deploying a phrase the ECB had used previously to signal a hike was only a month away. For a July move, Trichet would probably repeat the language he used in April, when he said the ECB would "monitor very closely" upside risks to price stability. A Reuters poll last Thursday showed a majority of 76 economists polled expected the ECB to raise rates next in July though data released a day later showed an acceleration in euro zone inflation to 2.8 percent in April. (By Paul Carrel Editing by Mike Peacock) Additional content:

NEW YORK, May 3 (Reuters) - The United States sued Deutsche Bank AG, accusing the German bank and its MortgageIT Inc unit of repeatedly lying to be included in a federal program to select mortgages to be insured by the government. In a civil complaint filed in U.S. District Court in Manhattan, the government said that defendants recklessly chose mortgages that violated program rules "in blatant disregard" of whether borrowers could make mortgage payments. The lawsuit seeks triple damages and other penalties for violations of the federal False Claims Act. Deutsche Bank had no immediate comment on the complaint. The bank's shares were down 2.6 percent in late afternoon trading in Frankfurt. According to the complaint, MortgageIT from 1999 to 2009 endorsed in excess of 39,000 mortgages with principal totaling more than $5 billion for Federal Housing Administration insurance, meaning they were backed by the federal government. The government said the defendants profited from the resale of the mortgages, even as thousands of U.S. homeowners faced default and eviction. It said it has paid out more than $386 million of FHA insurance claims and related costs, and expects to pay out hundreds of millions of dollars more. "Deutsche Bank and MortgageIT had powerful financial incentives to invest resources into generating as many FHA-insured mortgages as quickly as possible for resale to investors," the complaint said. "By contrast, Deutsche Bank and MortgageIT had few financial incentives to invest resources into ensuring the quality of its FHA-insured mortgages." Deutsche Bank bought MortgageIT in 2007, the complaint said. The case is U.S. v. Deutsche Bank AG et al, U.S. District Court, Southern District of New York, No. 11-02976. (Reporting by Jonathan Stempel, editing by Gerald E. McCormick, Dave Zimmerman)

* FED'S HOENIG SAYS WORRIED EASY MONETARY POLICY COULD CREATE ASSET BUBBLE * HOENIG SAYS RAPID WITHDRAWAL OF MONETARY ACCOMMODATION COULD SHOCK FINANCIAL SYSTEM * HOENIG SAYS U.S. MUST NOT GET RID OF CENTRAL BANK * HOENIG URGES BANKERS TO PUSH BACK AGAINST EFFORTS TO PARE BACK REGIONAL FED SYSTEM * FED'S HOENIG SAYS NOT ANTICIPATING A CRISIS, BUT NEED TO MINIMIZE RISK BY SLOWLY REMOVING ACCOMMODATION * HOENIG - LEGISLATION RESTRICTING REGIONAL FED ROLE WOULD BE TRAGIC * HOENIG SAYS ECONOMY WOULD HAVE GROWN FASTER IF NOT FOR BAD WEATHER, EXPECTS PICKUP LATER THIS YEAR * HOENIG - YOU CAN'T HAVE EXTREME ACCOMMODATION WITHOUT INFLATIONARY PRESSURE

It was another fairly quiet overnight session with Japan out on Holiday. After a fairly steady decline throughout yesterday's session, stocks continued to decline overnight with the S&P down about 5 points from last night's close. Though a bit choppier, 10yr yields have benefited from a roughly connected stock lever and are currently near their best levels of the day, week, month, year at 3.258 in low volume. MBS haven't been able to keep up into the mild rally, however, with FNCL 4.5's once again battling resistance at 103-00 (currently 3 ticks up on the day at 102-31). The first scheduled econ data hits at 10am with Factory Orders.