How bad can life really be with 3.5 coupons over 101 and 4.0 coupons over 104? 10yr notes are at 2.116 as well. All of the above speaks to extreme bullishness of bond markets in the mid to long term. But zooming in on this morning, they're getting beat up a bit. We knew that the stock lever was likely to be in play today owing to the absence of scheduled data in addition to the fact that stocks and bonds have just generally been following each other quite a lot as they operate near these long-term technical levels. So resilient/rallying stocks are bad for bonds, and that's what we have this morning. There was a distinct downwardly sloped line that stocks kept bumping into yesterday. This morning, that same line offers a clear supportive bounce--classic example of a "pivot point" or short term inflection (one man's floor = another man's ceiling). Since then S&P's have packed on a bit more than a point and are currently at 1153.17, testing a breakout of the 1150 level, which is a pertinent tech right now. A break of that will likely push 10yr yields higher (although 10's have been surprisingly resilient in the mid 2.11's in the last 10 minutes, so perhaps there's hope that 10's are "calling the stock market's bluff" in a way). If 10's do move higher, even though MBS have been doing a great job of tightening vs TSYs into this little sell-off, MBS might have to give up some ground as well. But to stay on that "tightening" topic for one more moment, remember yesterday how 10yr yields were up nearly a point at times when MBS were barely positive at all? Today, 10yrs are down 13 ticks currently whereas 3.5's and 4.0's are down only 11 ticks and 7 ticks respectively. Granted price vs. price isn't always an accurate way to identify spread differences, you can at least see the improvement from yesterday.

(Reuters) - Soaring costs for borrowing dollars to fund the daily business of Europe's banks is hitting their shares and feeding worries that the continent's spiralling debt crisis could trigger the next funding crisis for lenders. Though staying a long way below their 2008 levels when Lehman Brothers collapsed, key indicators such as interbank borrowing rates for dollar funds and the cost of swapping euro interest payments into dollars are on the rise. The collapse of Lehman sparked a total breakdown in lending markets -- not just in Europe -- which is now a far more remote prospect, traders and analysts said. But if a repeat of this situation remains unlikely -- especially as euro zone banks under pressure can access funding through the European Central Bank if needed -- the trend is going the wrong way, and could quickly worsen. "If we see some more, it's going to cause alarm bells," said Philip Tyson, a strategist at MF Global. The worst-hit UK banks in the stock market -- Barclays , Lloyds and Royal Bank of Scotland -- were also among those showing some of the biggest spikes in the cost for short-term dollar funds.

Bond markets are addicted and just can't get enough negative macroeconomic news to fuel the steamroller of a risk-off trade. Two things happened between yesterday and this morning leading to slightly lower prices this morning. First, the caliber of the overnight session's negative data/events was just not up to par with recent offerings. Some expected back and forth on the Greece debt collateralization situation. The second "thing" that happened is very much intertwined. It's not so much a "thing," but really a "concept." Here goes: 10 YR NOTES ARE IN THE LOW 2's AND HIT 1.97 YESTERDAY! There's going to need to be an ongoing supply of news/headlines/events of a sufficient caliber to motivate a sufficient level of the "risk-off" trade. One might also think of it as a technically motivated rejection of the 2.06 record closing low breakout attempt. However we choose to look at it, the facts are simple. 10yr yields are currently fighting for support at their key technical level from yesterday at 2.10. MBS are not really underperforming any more (they got that out of the way yesterday!) as 3.5 Fannies are 11 ticks down at 101-13 and 4.0's are 9 ticks down at 104-08. Rate sheets should be a bit weaker this AM.