Treasury prices bounced yesterday after a few horrid sessions, led by a strong rally in the 30-year bond.  The yield on the bond dropped by 15 basis points, while the 10-year yield declined by 12, pushing that spread back to +142 basis points.  The 2-10 spread narrowed by about 8 basis points.  The rally kicked off slowly on concerns about Europe, and accelerated once equities showed real weakness (with most indices off by more than 1.5%) and press reports on weakness in the U.S. Muni market.  A lower-than-expected PPI report also supported Treasury prices; month/month Core PPI (ex Food and Energy) was down 0.6%.

MBS had a decent session, with buying from real-money and overseas accounts.  The 30-year current coupon spread ended up wider to the 5-10 Treasury blend, due to weakness in Fannie 3.5s and 4s, although higher coupons (that aren't involved in the current coupon calculation) performed better.  Implied vols ticked fractionally lower from Monday's close. Reprices for the better were reported late in the afternoon.

Two keys events will hit the market this morning, the consumer price index and housing starts. In addition, General Motors is expected to raise more than $18 billion in an initial public offering this week.

Key Events Today:

7:00 ― The MBA Mortgage Applications index has shown purchases on the rise in recent weeks. In the period ending Nov. 5, purchases rose 5.5% to mark their third straight gain, while refinancings took advantage of the 4.28% average 30-year mortgage rate and rose 6%.

“One thing is clear from the last two months of mortgage purchase applications reports: new filings are no longer falling,” said economists at Nomura. “What is less clear is whether home demand has picked up or simply stabilized at a very low level. Applications have risen 11% since mid-October. If this trend continues, it could mean home sales are poised to grow.”

8:20 ― Eric Rosengren, president of the Boston Fed, speaks before a Greater Providence Chamber of Commerce breakfast.

8:30 ― The Consumer Price Index, the more influential of the two inflation reports this week, is expected to show prices rose 0.3% in October, or 1.3% over the past 12 months. The core index, which excludes volatile energy and food prices, is set to rise 0.1%, or 0.7% annually ― well below the Fed’s unofficial 2% target. The annual core index in September was at its lowest level in nearly five decades, but while the level is worryingly low, the Fed’s renewed quantitative easing efforts are meant to be reflationary, so disinflation and deflation concerns have become less pronounced.

“We are not concerned about further disinflation turning into outright deflation, because we believe the economy is currently passing through an inflection point following which inflation will gradually begin to trend higher as economic momentum builds,” said economists at Deutsche Bank. “In turn, policymakers will become less worried over the low level of consumer inflation sometime in 2011.”

Economists at IHS Global Insight said the monthly discrepancy between headline and core prices owes to gasoline, heating oil, and diesel fuel prices ― they all climbed between 3% and 5% in the month.

“Meanwhile, some pass-through of higher food commodity prices should become increasingly evident at the consumer level,” they wrote.

8:30 ― The annualized pace of Housing Starts is predicted to fall to 600k in October from 610k a month before. Building Permits, which anticipate starts by a month or two, are expected to rise to 570k from 547k, suggesting there is at least some momentum in the pipeline. Low prices, improving employment conditions, and extremely low mortgage rates could all entice buyers into the market.

“The residential construction sector may have hit the bottom of the barrel, but it’s spending a heckuva long time scraping out the residue of a 2004 – 2007 construction boom,” said economists at Janney Capital Markets. “Major homebuilders, once the source of a large percentage of single family construction activity, remain very much on the side-lines and have generally chosen to preserve liquidity rather than jump into cheap (i.e., risky), new projects. That, along with ongoing hesitancy of banks to provide construction loans, leaves a much smaller pool of capital for the housing starts and building permits data to leverage.”

Breaking it down by major components, economists at IHS Global Insight note that single-family housing permits have fallen for six months in a row, which suggests that single-family starts should fall, while multi-family starts have been climbing faster than permits, indicating they won’t be able to keep up this month.

“With the economy adding more jobs, and the payback period from the second tax credit behind us, permits are likely to improve going forward,” IHS said.

9:15 ― James Bullard, president of the St. Louis Fed, gives welcome remarks before the “Past, Present, and Future of the Government Sponsored Enterprises (GSE's)” in St. Louis.

10:15 ― Fed outright Treasury coupon purchase (02/15/18 - 11/15/20) (e: $7-9 bln)