Treasuries rallied big yesterday on news out of Europe that Greece failed the austerity tests that the EU and IMF had set out in order to get another dose of financial support to avoid default. European finance chiefs meeting yesterday considered "technical revisions" for a second Greek bailout. Europe's financial leaders are fighting on multiple fronts, trying to extinguish the Greek crisis while insulating Italy and Spain and coming up with a formula for banks that the International Monetary Fund says face as much as 300 billion euros in credit risk.

The rally yesterday was huge and the mortgage markets went along but not nearly as strong as treasuries; the 10 yr yield dropped 14 basis points, its price up 49/32 while mortgage prices increased 11/32 (.34 bp). The stock market fell 258 on the DJIA.

This morning in early trading in stock indexes had the DJIA, NASDAQ and S&P all lower at 8:30 implying a weak opening at 9:30. Treasuries essentially unchanged from yesterday with mortgage prices down .06 bp at 8:30. At 9:30 the DJIA opened -100, the 10 yr note unchanged and mortgage prices -4/32 (.12 bp) frm yesterday's close.

At 10:00 Bernanke will begin testimony to the Joint Economic Committee on the US economy. Likely he will be questioned about Operation Twist and its impact on the economy and what the Fed has described as a significant risk of further decline. As is always the case when the head of the Fed testifies markets will listen closely. We would like the committee to ask Bernanke detailed questions about the European debt crisis and the impact it has had, and will have on the US economy and US banks. US bank stocks are being hammered recently, partly over Europe 's banks fall even though there is no evidence US banks are involved directly. The fear is that if big banks in Europe and US banks have inter-related swaps and other relationships our banks will suffer if Europe doesn't fix the mess quickly. At times it appears Europe 's leaders don't realize the negative global impact it is causing by its inability to solve the mess; 17 counties tied together by a common currency sounded great in 1999, now maybe not so good.

Goldman-Sachs out predicting Germany and France will fall back into recession.

At 10:00 August factory orders, the only data today, expected -0.2% was -0.2%, July revised to +2.1% frm +2.4% originally reported. No reaction.

Crude for November delivery declined as much as $2.16 to $75.45 a barrel in early electronic trading this morning, the lowest since Sept. 24, 2010. Supplies of crude are increasing with Libya back on line with more output than what had been expected, and weakening demand as the economic outlook is worsening.

The stock market in early activity is being hit hard so this morning, however there is not much improvement in the bond and mortgage markets after yesterday's huge rally. MBSs are lagging treasuries as the move to lower rates is safety buys as Greece teeters on default while European officials and the IMF cannot work out a deal acceptable to banks or the 17 countries. Traders waiting to hear from Bernanke as he begins testimony now (10:00 am). We have noted many times that when the 10 yr is trading below 2.00% as it is now, volatility will remain high; at 1.72% to move lower equities have to fall and Europe has to falter in efforts to avoid Greek default. The MBS market will follow treasuries but at this moment in time its all about safety, leaving the MBS markets behind somewhat.