Good Morning. Happy Standardized Test Tuesday!

My nephew has Maryland School Assessment tests today, we were pre-gaming this morning.  I remember those days pretty well...mostly because they were so incredibly boring and slow. Also because the test's time slots subtracted from favored subjects such as recess and P.E.

What I should really be saying is HAPPY FLIGHT TO QUALITY TUESDAY!!!

While you were sleeping, a senior director at Fitch Ratings by the name of Paul Rawkins told folks at a conference in London that Portugal's "pedestrian approach is a concern for us". Notice I didn't mention anything about Greece??? Yeh. Thats because more than one EU country is facing some sort of ratings downgrade. Whether or not these concerns are truly legitimate or a target of trader shorting strategies remains to be proven(structural problems are evident, but are traders making it worse?)...either way, US bills, notes, and bonds are/will continue to benefit from weakness abroad. We just have to hope the mainstream media doesn't start to focus in on our state budget issues....cause then we will be in trouble and we could start to see headlines like this: FITCH WARNS OF POSSIBLE DEFAULT IN EUROZONE

Also helping out the domestic bond market was the release of the National Federation of Independent Business survey results. If you recall, last Thursday when I discussed the outlook for the Employment Situation Report, I told you that small businesses make up a majority of labor demand in the US. That should shed some light on the importance of small business owner sentiment. From the survey: the Optimism Index fell 1.5% from 89.3 in Jan to 88.0 in February. This is 7 points higher than the low of 81.0 seen in March 2009. I should also note that the Optimism index hasn't really moved since rebounding to 86.8 in the following April. Most of the weakness was generated via  "EXPECT A BETTER ECONOMY" index, which fell 10% in February.  Market participant's view on credit conditions also worsened, albeit by only 1%.

Bill Dunkelberg, the NFIB's chief economist says:

 “News about the economy is for the most part improving, and therefore is an unlikely source of small business uncertainty and declining optimism. The Washington, D.C. agenda, on the other hand, remains a nightmare for small business owners and continues to be a real factor in small business owners not expecting business conditions to improve,”

One more thing, last night the dude at the Federal Reserve who probably has the best read on the pulse of financial markets, Brian Sack (his real title is VP of the N.Y Federal Reserve and Head of the Markets Group) provided a terrificly thorough statement on the Fed's strategy for a smooooooth exit from accommodative policy tools and the eventual withdrawal of excess reserves from the banking system. The overall tone was DOVISH, as in the Federal Reserve is extremely cautious about removing supportive policy (HIKING THE FED FUNDS RATE). We can expect much communication and transparency.

So....there you have it. Three bond bullish events in one day vs. one 3 year Treasury note auction that usually sees high demand from direct and indirect bidders. (As long as dealers are not the main source of auction demand we're doing well)

The resulting trade in financial markets has been:

A STRONGER U.S. DOLLAR

WEAKER STOCKS

 LOWER BENCHMARK TREASURY YIELDS (in almost no volume). Notice the bounce off of 3.68%. Yeh. The rates market is being traded in a very technical manner...meaning anyone who is trading has stops at pivot points.

AND LAST BUT NOT LEAST.....RATE SHEET INFLUENTIAL MBS PRICES ARE HIGHER!

AND MBS YIELD SPREADS ARE STILL TIGHTER THAN KATHY IRELAND'S OSCARS DRESS. I lost the remote control battle that night btw...I did not watch by choice. But yeh...current coupon yield spreads are still super duper uber rich (tight).

Participation in most markets is way below average...yesterday was the thinest trading day of 2010 for stocks. Ain't no one playing ball right now.

One last observation: the above discussed comments from Brian Sack the ongoing problems in the EU are part of the reason why we are calling for a continued range trade in the bond market. READ MORE ABOUT OUR OUTLOOK

NEXT EVENT: $40 billion 3s at 1pm