Is the flight to quality back on?

Ten-year Treasury yields are 3.5 basis points lower in early trading at 2.96% and the Fannie Mae 4.0 MBS coupon is +8/32 at 100-29 (after the roll). In his morning note MND's Adam Quinones says that auction concession drove yields higher this week but the underlying tone remains bullish in the bond market. He was encouraged by "Lift-Off" support levels holding yesterday as well. SEE MORE

One culprit of strength in bonds this morning:  UK industrial production fell 1.7% on a monthly basis in April, versus predictions of a flat month. The March gain was +0.3%. Manufacturing orders fell 1.5%, far worse than expectations of a 0.1% decrease.  "Investors remain cautious regarding global economic recovery in the face of increased uncertainty over the next Greek bailout package," said economists at BMO Capital Markets. 

S&P 500 futures are 0.15%s lower at 1,285.75 and Dow futures are down 0.27% at 12,089. On Thursday the stock market broke a six-day losing streak as the Dow added 75 points - its first gain in June - but the session ended on a soft note as stock sold off in the final hour. The S&P ended 0.74% higher, or up 9.4 points. 

Other overnight news included a widening trade surplus in China. At $13.1 billion, the May surplus failed to meet forecasts of $19.8 billion, but it did expand from $11.4 billion the month prior. Exports slowed to a 19.4% growth rate (annualized), compared with a 29.9% pace the month prior.

Light crude oil fell 1.01% overnight to $100.94 per barrel, while gold prices declined 0.05% to $1,542. Brent crude, meanwhile, jumped to a five-week high of $120 per barrel after Thursday's trade deficit was narrower than anticipated. 

Key Events Today:

8:30 - Reuters reports May import prices should see their first monthly decline since June 2010, dipping 0.7 percent compared with a gain of 2.2 percent the month before. A sharp fall in oil prices in May was early enough to be partially captured in the survey, and a 4.5 percent decline in petroleum should more than fully explain the decline. Without petroleum, only a marginal slowing is expected from April’s 0.6 percent increase, with a weak dollar still supporting prices. Export price growth should also slow from four straight gains of above 1.0 percent with farm prices showing a loss of momentum, but they should remain a bit positive with a 0.3 percent May increase.

9:00 - New York Fed President William Dudley speaks on the national and regional economies.

2:00 - The Treasury's Budget Statement for May is unlikely to bolster spirits. The monthly deficit is expected to come in at $140 billion, with forecasts ranging from $130 - $165 billion. While the April figure - typically a surplus month given tax season - was just $40.5 billion, a comparison to May 2010 is what the market looks at. And by that measure, forecast still don't look pretty. The May 2010 deficit was $135.9 billion.

According to Bloomberg, the average deficit for the May has been $90 billion over the last decade and $120.4 billion over the past five years. 

In other news, Reuters reports that today is the deadline for IMF member countries to declare the names of candidates to succeed Dominique Strauss-Kahn as IMF managing director. So far, French Finance Minister, Christine Lagarde is the top candidate, along with Mexican central bank governor Agustin Carstens. The main obstacle in Lagarde's bid for the top IMF job is the possibility of an inquiry into her role in a 2008 arbitration payout. Carstens, her rival, is due to visit China next week.