Early this morning the stock indexes were better after the strong rally yesterday, the bond and mortgage markets under pressure; by 9:00 the indexes reversed and were lower taking the rate markets back to unchanged. Trade continues to thin out with holidays coming on quickly, increasing the potential of volatility. Europe still holds the key; yesterday's rally in equities and selling in the bond market was driven to a large extent by Spain's sale of 3 mo bills at a rate about 4.0% lower than last month.

The ECB awarded 489 billion euros ($645B) in 3 yr loans today, the most ever in a single operation and more than economists' median estimate of 293 billion euros. The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark interest rate -- currently 1.0% over the period of the loans. The ECB is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. In addition to the longer-term loans, the ECB has widened the pool of collateral banks can use to secure the funds.

The DJIA opened slightly better at 9:30, +10; the 10 yr +2/32 at 1.92% unch and mortgage prices +1/32 (.03 bp).

The weekly MBA mortgage applications were down last week. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.6% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 1.6% from the previous week. The seasonally adjusted Purchase Index decreased 4.9% from one week earlier. The refinance share of mortgage activity reached a high this year of 80.7% of total applications from 79.7% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to a low this year of 5.1% from 5.6% of total applications from the previous week.

At 10:00, a few minutes ago, Nov existing home sales were expected up 2.2%, increased 4.0% to 4.4 mil. The median sales price at $164,200 a decline of 3.5% yr/yr; based on sales there is a 7 month supply. The NAR revised sales between 2007 and 2010 down another 14% based on double listings; the revised sales show sales were even lower than what had been reported.

At 1:00 Treasury will auction $29B of 7 yr notes to complete this week's borrowing. The 2 yr and 5 yr didn't meet recent strong demand but both were modestly OK.

There is nothing new here; the bond market trade moving on how the equity market indexes trade; so far this morning stock indexes are weaker supporting the bond and mortgage markets. The MBS market isn't doing much recently, slight gains when the Treasury markets rally and not much decline in prices when treasuries trade lower in price as they did yesterday. We continue to believe the bond and mortgage markets will trade in narrow ranges through the remainder of the year.