Interest rates started a little higher this morning but are holding well after the 10 yr closed at 1.97% yesterday. Early this morning the 10 yr traded at 2.03% at 7:30, but by 9:00 it fell back to 1.99%. Mortgage prices a little lower in line with the 10 yr price decline; stock indexes were pointing to a better open at 9:30 (at 9:30 the DJIA opened +40). There was no economic data today until 10:00 when Oct leading economic indicators, expected up 0.6%, increased 0.9%; Sept revised to +0.1% frm 0.2%. The LEI suggests the economy is holding and improving a little. There was no noticeable reaction to the better report. At 10:05 the 10- yr at 2.00% +3 bp and mortgage prices -.12 bp. Although LEI is better the outlook for employment still is dismal.

In Europe the ECB was in again buying Italian and Spanish bonds keeping their rates under what is considered a key rate at 7.00%. A rate over 7.00% for Italian bonds is being considered as the level that has to hold if Italy and Spain have any chance of avoiding defaults because the austerity cuts at higher rates would be impossible to achieve. European officials may start talks with the International Monetary Fund on a mechanism for the ECB to lend to the IMF for sovereign bailouts in the region, Dow Jones Newswires reported. Agreement on the proposal between ECB and IMF may result in an announcement at a European Union summit on Dec. 9, Dow Jones said, citing two unidentified people with direct knowledge of the matter. Sounds nice but we won't hold our breath that a workable plan will emerge; it hasn't happened in the last 2 yrs.

The ECB is continuing to buy Italian and Spanish debt, how that is being justified is unsure since the EU treaty precludes the central bank from buying individual country bonds. Nevertheless it is doing it and it seems the only actual activity in the region. With the EU teetering on the edge of potential breakup all the rules are subject to change. Germany continues to resist the intervention by the ECB, and Germany is at increasing odds with France over how to deal with the debt crisis. The longer the crisis drags on the more EU countries will turn inward toward their own interests above those of the EU as a group. Germany is already thinking outside the box of the EU.

A little better to start today in the equity markets but no assurance the key indexes can improve. A stronger equity market today would work against the rate markets; not something new though, that has been the trade fro months----higher indexes equals lower prices in rate markets.

Yesterday the 10 yr closed under 2.00% and increased the bullish technical outlook. The 10 remains slightly below 2.00% this morning, the longer it holds the better the outlook fro mortgage rates. The relative strength in the bond market is increasing and more of our studies are turning more positive. That said, even with Europe and safe haven moves, if US equity markets rally it will take a toll on rates.