Generally a quiet start for the bond and mortgage markets this morning; at 9:00 the 10 yr -3/32 and MBSs +3/32 (.09 bp). Stock indexes in pre-open trading were better indicating a better open at 9:30. There are no economic reports today; the only thing in the US that we will be watching is Treasury's $32B 3 yr note auction. In Europe its Greece and Italy that need watching.

European banks are increasing sales of bonds on Italy, Spain, Greece, Portugal and Ireland. Banks are selling debt of southern European nations as investors punish companies with large holdings and regulators demand higher reserves to shoulder possible losses. The European Banking Authority is requiring lenders to boost capital by 106 billion euros after marking their government debt to market values. The trend may undermine European leaders' efforts to lower borrowing costs for countries such as Greece and Italy, while generating larger writedowns and capital shortfalls.

Greece is working on setting up an interim government, what is described as a technical government run by people that are not seeking election. A good idea, tough decisions must be made on pensions, retirement age, job cuts and more.

Italy's Chamber of Deputies began debate before a vote that will show whether Prime Minister Silvio Berlusconi has enough support to stay in power. The ballot is expected at 5:00 p.m. in Rome (about one hour from now), is on a routine report on last year's budget plan that will reveal whether Berlusconi retains a majority in the 630-seat house. It's the first such test since three party members defected to join the opposition and six others publicly called on the premier to quit.

In Britain more job losses that previously anticipated are likely. The scale of the job shedding underscores the growing risks to the economic outlook at a time when unemployment is at a 15- year high and the threat of the euro area splintering is rocking financial markets. Unions representing teachers, health workers and civil servants preparing to strike on Nov. 30 over plans to make government workers contribute more toward their pensions and retire later.

Europe can't avoid slipping back into recession, if it isn't already there now. The sovereign debts are so large that austerity, job losses, pay freezes cannot be properly implemented without dragging the region into deeper economic decline. We are left with the question of how much of the economic slide in Europe will impact US. The US will suffer on exports, how deeply is what analysts are beginning to try and assess.

The NFIB report on small businesses this morning isn't encouraging; "Owner optimism improved a smidge, mostly because the outlook for business conditions and real sales growth became less negative, but these two Index components are still solidly negative, more owners with negative forecast than a positive one. Hardly the basis for strong economic growth. There was no improvement in the labor market indicators so job creation will remain well short of that needed just to keep up with population growth much less reduce the unemployment rate. Capital expenditures remain depressed and there is little interest in investing in inventory. Few firms have any interest in expanding as well, leaving loan demand weak (about 2/3rds of all owners have no interest in a loan and borrowing activity is at a 38 year low level). More firms report negative sales trends than positive ones, consistent with consumer sentiment readings rivaling the 1980 recession levels. Unemployment remains at 9%, the stock market volatility is scary, house prices still weak, prospects for Europe aren't great and the Administration's policies continue to be disparaged by record numbers of households. The President calls for "bigger", but if excessive government spending and deficits are what most consumers fear, then "bigger" will only depress consumers more as we follow a fiscal path that looks like Greece."

The 10 yr note is still unable to break 2.00%, MBSs equally unable to break into bullish technicals. It isn't news that interest rates are completely influenced by how equities trade; as long as stock indexes rally the rate markets will not improve. Safety moves on Europe's mess that push investors into treasuries continue but not as has been the case over the last few months. That said, the bond and mortgage markets are holding nicely at present levels. Generally a neutral condition now.