Bonds got crushed yesterday as equities took desperate measures to avoid an all out collapse. The 10yr note yield rose almost 12 basis points to 3.101% and production MBS coupon prices dropped 21/32 in price, forcing lenders to reprice for the worse on multiple occasions. READ MORE

Benchmark Treasuries traded mostly sideways to slightly better in the overnight session as stocks came off yesterday's highs after Eurozone finance ministers came to another impasse on the (n)ever-evolving debt crisis in Greece.

(Reuters) - Edgy investors ditched lower-rated euro zone government debt on Wednesday, sending Greek bond yields soaring to new highs after officials showed little sign of progress on a new deal to tackle Greece's crisis. Differences of opinion between policymakers on how to involve private holders of Greece's debt in a new bailout package have heightened uncertainty in financial markets, pushing Greek, Irish and Portuguese bond yields to euro-lifetime highs.  "Hopes get dashed more and more that we won't get a waterproof solution by the end of next week," said Commerzbank rate strategist David Schnautz. "This is placing another big layer of uncertainty over everything and it sounds like you don't want to be that much invested in the periphery at the moment,"

Trading volume was above-average but not huge into the marginal recovery bounce in bonds. The 10yr note is currently +7/32 at 100/13 yielding 3.077%. The 2s/10s yield curve is 1bp flatter at 265bps wide. And the Fannie Mae 4.0 MBS coupon is +4/32 at 100-09. S&P futures are -8.00 (-0.62%) at 1282. Dow futures are -41 (-0.34%) at 12,033.

The day ahead is busy. Here's a look at the calendar of events....

Wednesday:

8:30 - After five months of 0.4% and 0.5% increases, Citigroup says the Consumer Price Index should be flat in May. Expectations range from flat to +0.3%, with the consensus at flat. As with the producer price index, costs should remain subdued due to a sharp decline in energy prices.

"Energy prices finally broke the string of big jumps and seasonal adjustment factors accentuated the reversal into a meaningful decline," Citi economists said, echoing others. "Apart from food and energy, we look for a continuation of the recent trend of modest increases."

Citi noted that recent price gains have been centered in transportation as gas prices soared and airlines passed on higher fuel costs to consumers. 

"Importantly, there was little leakage to other goods and services, and inflation expectations remained anchored throughout the run-up in energy prices," they said.

The core index, which excludes volatile food and energy prices, is set to rise 0.2% for a second consecutive month.

8:30 - The first regional manufacturing report for June is anticipated to show faster growth than in May. The Empire State Manufacturing Survey dropped nearly 10 points last month to a score of 11.9 - well above the zero-mark suggesting growth, but a big enough drop to initiate worries of a turnaround in the sector. Uncertainty for the report is reflected in the variety of forecasts, which range from 3.8 to 18.1

"The anecdotal accounts from the Fed's Beige Book suggest there is more weakness to come in the regional manufacturing surveys," said economists at Nomura. "Reinforcing our forecast of a relatively weak reading of the Empire State index (3.8 versus) the Labor Department in the latest report on jobless claims cited increased manufacturing layoffs in New York."

9:00- The Federal Reserve Consumer Advisory Council meets to discuss national mortgage servicing standards, real estate owned issues; proposed rules regarding ability to pay for mortgage loans, risk retention proposal and "qualified residential mortgages" and the proposed rules regarding remittance transfers

9:15 - Industrial Production is expected to grow 0.3% in May, following a flat reading in April and a 0.7% jump in March. Forecasts range from a 0.3% decline to a 0.4% boost; the uncertain factor is impact from the March 11 earthquake in Japan.

"The auto segment probably stabilized after a big drop in April, but production remains weak because of the earthquake disruptions," said economists at IHS Global Insight. "The rest of manufacturing is firming, but not very fast. Total hours worked rose just slightly in May, but allowing for rising productivity that should be enough to raise manufacturing output 0.3%. Although not in retreat, the industrial side of the economy is no longer at cruising speed."

Added economists at Citi: "Based on industry data, assemblies were little changed in May from the low April levels. So there was no new deterioration in vehicle production. We expect vehicle production to remain low for several more months, but automakers claim that operations will be on a path toward normalization by late in the third quarter."

The capacity utilization rate should inch up to 77.1% from 76.9%, according to the median forecast.

10:00 - After last month's Housing Market Index, NAHB Chairman Bob Nielsen said homebuilder confidence had "hardly budged over the past six months as persistent concerns regarding competition from distressed property sales, lack of production credit, inaccurate appraisals, and proposals to reduce government support of housing have continued to cloud the outlook."

Data has only gotten worse since with home prices continuing to fall. Economists thus expect the survey to remain at 16 - far, far below the 50 level indicating optimism. 
"Builders are depressed and with good reason," said economists at Nomura Global Economics. "Housing completions are at all-time lows as builders cut activity significantly under flagging demand for new homes. In six months the housing market index has been unable to bounce off the level of 16 and we do not expect it to do so in June either."