It's a full blown sell-a-thon in stock markets at the moment with S&P's having now charged straight through Friday's lows now down around 25 points to 1233. But even when they were 10 points higher earlier this morning, 10yr yr yields were essentially at the same levels they are right now--just over 2.00. In fact, we're seeing a lot of resistance to the notion of taking 10's under that 2% level with ostensible culprits being the need to discount impending auction supply as well as a modicum of unknown from tomorrow's FOMC announcement. Here's how the phenomenon looks on a chart:

As more folks wake up and decide which buttons to push this morning, the one that sells stocks and buys bonds is increasingly popular. Although there were certainly plenty of doubts and criticisms of Friday's anticlimactic EU Summit details, it seems that markets didn't have the heart to trade accordingly on its special day.

With that out of the way, things are getting back to the status quo. S&P futures have already erased all 20 points of Friday's gains and 10yr yields are back to almost the dead center of November's range (2.01 in a 1.95-2.07 range). MBS haven't caught quite the same magnitude of wave as their benchmark big brothers, up only 6 ticks at 102-05, but they've outperformed so mightily over the past few sessions, that a bit of underperformance feels like its more of a balance-restorer than a negative statement about MBS.

At current levels, we'd be on guard against a bounce in stocks being perceived as a rebuttal to this morning's "risk-off" trading (itself a rebuttal to Friday's "risk-on" trading... ebbs and flows?) and combined with some slight apprehension about the auction cycle and rapid approach of year-end, causing a bit of a correction to current gains.

Although it's not occurring in some dramatic "panic in the streets" fashion, we're greeted with the impression this morning, that the EU Summit is increasingly viewed as a failure. One can talk about the nuts and bolts of the proposed changes and how they might benefit the European economic landscape in years to come, but any such discussion is inherently SUBJECTIVE and SPECULATIVE whereas auction stats do not lie.

To wit, a 12-month Italian bill auction has the most profound commentary from the overnight session. Italy is generally regarded as the next shoe to drop after Greece, but in a more dangerously systemic way. So the fact that even with reports of the ECB buying short term Italian debt, and even after the EU Summit, and even with all the positive talk on Austerity measures last week, that the 1yr auction only improved to 5.952 from a 6.087% at the last auction, speaks volumes as to how the current situation has evolved---basically: not very well. In the more important longer maturities, the damage is worse: 10yr Italian yields rose 45bps to 6.83 pct earlier this morning, rapidly encroaching on the apocalyptic 7%+ zone. There are more auctions to come in Europe and Merkel will give a statement on the Summit in German Parliament this Wednesday.

Elsewhere in the world of sovereign debt, we're gearing up for 3's, 10's, and 30's at home this week, beginning today with 3yr notes at 1pm. The process of discounting this upcoming Treasury supply could weigh slightly on bond markets, but that's currently more-than-offset by the overall "risk-off" shift following the EU Summit. 10yr yields are roughly 4 bps lower this morning, the curve is flatter, and Fannie 3.5 MBS are up 4 ticks at 102-03. There's no significant data between now and the 3yr auction.

The following Reuters piece is fairly indicative of the prevailing sentiment this morning, that is, that the EU Summit was more or less a flop....

(Reuters) - A European summit deal to strengthen budget discipline in the euro zone failed to restore financial market confidence on Monday, forcing the European Central Bank to step in again gingerly.

The euro fell, stocks slid and borrowing costs for Italy and Spain rose as investors weighed the outcome of last week's summit that split the European Union, with Britain blocking treaty change and forcing euro zone countries to negotiate a fiscal accord outside the Union.

Friday's initial market rally petered out in less than 24 trading hours due to legal uncertainty surrounding the new pact and the absence of an unlimited financial backstop for the single currency.

Michael Leister, rate strategist with German bank WestLB in Duesseldorf, said the summit outcome had done little to restore confidence in the absence of stronger central bank action.

"The question is will this help to stabilize sentiment? I don't believe so, given that those comments from (ECB President Mario) Draghi ruling out a bazooka during the ECB conference are still weighing on spreads," he said.

much more: