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Prices of Treasury coupon securities have posted modest losses in overnight trading as the bond market surrenders some of the chunky gains achieved yesterday in response to the Bernanke papal bull. That proclamation was a solid recitation of a litany of reasons why the funds rate is likely to remain low for a very long time.

The yield on the 2 year note has increased 2 basis points to 0.78 percent. The yield on the 3 year note edged higher by 2 basis points to 1.31 percent. The yield on the 5 year note also climbed 2 basis points to 2.21 percent. The yield on the 7 year note added 2 basis points and rests at 2.89 percent. The yield on the 10 year note added 2 basis points and stands at 3.35 percent. The 30 year bond bucked the 2 basis point trend and increased a basis point only to yield 4.28 percent.

The market, I think, will need a new dose of rhetorical steroids from the Chairman or solid evidence of economic distress to foster additional price gains. There is significant resistance for the 10 year note around the 3.30 percent level and we climbed within spitting distance of that level yesterday.

I note that because tomorrow the Treasury will announce a batch of supply in the front end which should total around $115 billion and which will auction next week. The package will include (about) $45 billion 2 year notes, (about) $40 billion 5 year notes, and (about) $30 billion 7 year notes.

There was substantial buying of 10 year notes in the refunding process in the 3.50s and that has proved a righteous level to establish long positions. Similarly, sales of 10 year notes in the low 3.30s and high 3.20s have been well placed and successful.

I suspect that history will limit and temper price gains, absent some impetus from the economic fundamentals.

In that regard several pieces of the economic puzzle are available for public perusal this day.

PPI should register a gain of about 0.4 percent as energy drives that inflation gauge higher. At the core level the index should post a subdued gain of about 0.1 percent.

Paid prognosticators and pundits should receive plaudits for predictions that production of the Industrial variety posted solid gains of about 0.5 percent last month. Those same folks attribute the potential gains to weather related strength in utilities.

I posted an excerpt from a note by Ian Morris of HSBC in which he suggested that the Bernanke speech was so dovish that Ian stated that it leads him to believe that another round of QE of some variety is possible when the Federal Reserve finishes this round of balance sheet bloating in the spring.

I note that because David Ader of CRT made a similar point in his morning note to CRT clients this morning. Here is the relevant excerpt from that missive:

“We bring these up in the Tactical Bias to underscore what we deem a real risk in H2 that the Fed’s subscribed to conclusion of quantitative easing may have to be rethought. We’re toying with this, but the idea is that if lending is impaired and the Fed’s ending of QE drives mortgage rates out then we have a double whammy on housing et alia. This brings up a very real potential that the Fed is forced to extend QE in MBS, ABS maybe. We bring it up as something to muse vs. trade.”

Source: Bond Expert: Tuesday Outlook