Interest rate products stabilized on Tuesday allowing the market to digest yesterday's swift sell-off. We warned you last week that this would be a slow news week...and it has been. The only guidance that Treasury traders seem to be relying on is the direction of equity trade. Unfortunately, thin stock volume has resulted in yesterday's questionably relentless rally and today's refusal to correct. While we have been bullish the S&P since the index made its low in the 870's we were a little surprised at the magnitude of the rally. That said, we still believe that the S&P will make its way higher, approximately to the 940 area; if this is an accurate assumption, Treasuries should find themselves retesting the May lows and slightly beyond.

Keeping bonds and notes under pressure are assumptions that the U.S. economy is showing signs of recovery. The newest evidence supporting this theory is a statement made by Gary Stern, President of the Minneapolis Fed; As we get into the middle of 2010 and beyond, I would expect to see a resumption of healthy growth. He also downplayed the role of deflation, To date, there is scant evidence of deflation in so-called core measures of inflation. He added, If economic growth resumes in the United States as I expect, the threat of deflation should diminish commensurately.

Additionally, while the Fed has taken a breather when it comes to note issuance, corporations have not. Barclays is looking to sell at least $500 million in non-guaranteed 10-year notes and Verizon issued nearly $4 billion in various 2-year instruments.

We are going to stick with our original call for now...We think that the T-bond could see 119'08 and maybe even the mid'118's before finding buyers. Note traders should look for support near 119'11 and again at 119. The first area of support for the 5-year note futures looks to be near 116'21 with 116'01 being significant support.

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does.