The following article is a really interesting component of the current "risk-on" sentiment. Some of you might remember when the ECB announced dollar-based funding that would ensure European banks retained sufficient liquidity to operate through the end of the year, that the reaction was positive for stocks and negative for bonds. It also seemed like the collective "panic" was able to breathe some sort of sigh of relief.

But now that the first of those liquidity facility offerings has come and gone with little fanfare. Apparently market participants in Europe weren't as hard up for cash as the panic seemed to suggest, having been able to borrow at lower costs elsewhere.

That's the sort of panic that fueled the risk-off trade, helping bond yields lower. The demand for today's dollar offering is just an apropos piece of evidence that the current pain in bond markets is all about an unwinding of the "risk-off" trade in Europe.

A few quotes from the article linked below: "It's not surprising to see a small demand because the implied cost of obtaining that funding via the ECB is higher than the market," said Morgan Stanley strategist Elaine Lin.

"It shows that there are only a limited number of banks that are not able to get any market access. Anybody who has access would rather use the market than the ECB."

There are two big drags on MBS charts this morning. If you look closely, you might even notice things shoot down once between last night and today's first tick, and then again, from that tick down under 101-00 in Fannie 3.5's.

The first drop simply a change in coupon being displayed. October's settle today and November's take over. The second drop is the generally bond-bearish start to the day, which is affecting MBS and Treasuries alike. Stock futures are also soaring.

There are two, maybe three big sources of levity for the stock rally. With Slovakia assuring the world they'll "get 'er done" there's some slight ongoing optimism about the EFSF vote passage. But the bigger news on EFSF overnight comes from the Allianz, via the WSJ:

With time running out to finalize the euro zone's bailout fund, a plan by giant German insurer Allianz to turn the fund into a bond insurance program is gaining traction, the company's top executives said Tuesday. The proposal to turn the European Financial Stability Facility into a institution that protects investors against a portion of losses has garnered support from other major European insurers and banks

Combine that with better Industrial Production numbers in the Eurozone (+1.2% vs -0.7% forecast), and it's not a bond friendly environment so far this AM. Just keep in mind that a big portion of the apparent weakness in MBS is due to the roll.