Last week saw lackluster trading with limited economic data for stimulation, and this week's CPI and PPI reports as well as Chairman Ben Bernanke's semiannual testimony to Congress further limiting participation. There was expectation that the early week events for mortgages - paydowns and calendar flip - would provide a supportive tone through the first half of the week at least, but the looming near-term events and medium-term outlook kept investors close to the sidelines instead.
Overall volume was below average with flows directed out of 5% coupons and into higher coupons. JPMorgan Securities strategic principal trader David Montano said in comments last week that it's a bit puzzling that the continuing cheapening in 5s isn't drawing any support. He said there are likely "fears that there will eventually be outright selling in the coupon and given the magnitude of the position, market caution might be justified." The impact of a slowing housing market is also a concern.