Loan pricing looks to weaken moderately this morning as bond prices fell overnight and equities rose on news that China would be investing in Portuguese bailout bonds.

In above-average trading volume, the benchmark 10-year yield backed up two basis points to 3.15% in early trading after spending the overnight session in a range from 3.13% and 3.16%. The 2s/10s yield curve spread is at 261bps wide, 3bps steeper than yesterday's going out marks. Mortgages are outperforming benchmarks on the open. The FNCL 4.0 is -2/32 at 100-07 and the FNCL 4.0 is -2/32 at 103-15.

"Reports of Chinese interest in purchasing European bailout bonds dominated the chatter overnight," wrote economists at BMO Capital Markets. "With the European Financial Stability Fund expected to start auctioning Portuguese bailout bonds by mid-June, it may not be surprising that China would show interest after already participating in January's auction (which raised cash for Ireland's bailout)."

BMO notes rumors are circulating that that China Investment Corp. may also invest as much as 1.5% of its foreign exchange reserves to invest in New Zealand assets too.

Ninety minutes before the opening bell, S&P 500 futures are 4.25 points higher at 1,320.75 and Dow futures are up 25 points to 12,391. Shares in Asia, meanwhile, were mostly lower. Main indexes from China and Japan posted losses of 0.90% and 0.57%, respectively, while Hong Kong shares rose 0.07%.

Light crude oil is -0.03% at $101.29 per barrel, while gold prices are -0.39% to $1,520.70

Aside from new data, the G8 meeting gets underway in France today. The recent uprisings in the Middle East are reportedly a main focus. In other news, The White House on Thursday will announce plans to roll back dozens of regulations, including some that were designed to protect worker safety, as part of a promise to business leaders to decrease federal bureaucracy. The news follows a four-month review of US regulatory policy that was initiated in an effort to improve President Barack Obama's sometimes strained relationship with the business community. FULL STORY

Key Events in the Day Ahead

8:30 - Economists expect some upward revisions to first-quarter GDP, thanks to faster inventory accumulation and better trade relations than first projected. But even the most optimistic forecasts don't expect growth to match the previous quarter. The consensus looks for a growth rate of +2.1% from January to March, up from +1.8% in the initial estimate and compared with a 3.1% uplift in Q4-2010. Estimates range from +1.9% to +2.6%.

"The first-quarter slowdown in growth was exaggerated by bad weather and by a sharp drop in defense spending, but there is no question that the economy has entered a soft patch," said economists at IHS Global Insight.

"Most of the recalibration is in inventory and trade," wrote analysts at Citigroup. "The most notable change in this report will be a recasting of foreign trade. The monthly trade report for March showed much faster growth of both exports and imports than the Commerce Department had assumed. While the trade balance, and therefore the contribution to first quarter growth, was only marginally altered, the new figures imply a faster pace of demand growth both here and abroad."

8:30 - Initial Jobless Claims are expected to come in above the 400k mark for a sixth consecutive week in the period ending May 21. In last week's report, weekly claims fell 29k to 409k; this week economists expect further decrease, but only to 405k. 

"Initial jobless claims probably remained close to 400,000 after the effects of a series of special factors in April and early May boosted the level," wrote analysts at Citigroup, noting that flooding along the Mississippi River could result in more claims than anticipated

"There may be a surge in auto-related filings during the Memorial Day week as two major Japanese producers have announced temporary closures," they added.

Treasury Auctions:
1:00 - 7-Year Notes ($29 billion)