Treasuries rallied this week as the Fed announced in its FOMC Statement that it will hold rates at an ‘exceptionally low’ through late 2014. The Fed also announced it would now target inflation for the first time ever, with its goal being 2.0%. Treasuries in the belly of the curve saw yields fall as much as 12 bps as traders preferred shorter durations after the Fed’s announcement, and had little interest in the wings of the curve. Heavy buying of the 5-yr dropped its yield to a record low close of 0.752% on Friday. Underperformance from the long bond saw its yield shed just 2 bps for the week as the 30-yr yield fell to 3.064%. Elsewhere, a drop of 4 bps on Friday led the 10-yr to a decline of 11 bps for the week as it finished below 1.90% for the first time since January 18.

The yield curve flattened over the course of the week with the 2-10-yr spread tightening almost 11 bps to finish at 168.5 bps. Traders will continue to watch the 160 bp area as it remains significant support.

Auctions for the week were solid but not spectacular as Tuesday’s $35 bln 2-yr note auction went off as anticipated, drawing 0.250% and a strong 3.75x bid/cover. The dollar demand of $131.3 bln was the third strongest in the past 12 months. Wednesday’s solid 5-yr note auction drew 0.899% and saw a strong 3.14x bid/cover (12-auction average 2.86x) as indirect bidders took down an average 43.3% of the offering. The dollar demand of $110.9 bln was the strongest since July. Thursday saw a strong, but not spectacular, $29 bln 7-yr note auction. The auction drew a 2.73x bid/cover as indirect bidders took down a less than average 31.8% of the offering (12-auction average 31.8%).

The Week Ahead

Data flow begins on Monday as personal income and spending, as well as PCE prices – core (8:30) are released.

Tuesday’s data includes the Employment Cost Index (8:30), Case-Shiller 20-city Index (9), Chicago PMI (9:45), and consumer confidence (10).

Data continues to flow on Wednesday with the release of the weekly MBA Mortgage Index (7), ADP Employment Change (8:15), ISM Index (10), construction spending (10), and auto/truck sales (14). Philly’s Plosser will give his economic outlook on his home turf (8:30).

Thursday will see Challenger Job Cuts (7:30), initial and continuing claims, productivity-prel., and unit labor costs (8:30). Fed Chairman Bernanke will testify on his economic outlook and the federal budget in front of the House Budget Committee. Dallas’ Fisher will discuss the economy and monetary policy in Austin (19:15)

Friday’s data is the most anticipated of the week as nonfarm payrolls, nonfarm private payrolls, the unemployment rate, hourly earnings, average workweek (8:30), factory orders, and ISM Services (10) are all released.

There are no auctions of note.