A new record low for the 10 yr note this morning, at 1.67% at 8:30; stock indexes being crushed early on. Mortgage rates also at new record lows. Of course its all about Europe as has been the case now for well over a year; an index of executive and consumer sentiment in the 17-nation euro area fell to 90.6 from a revised 92.9 in April, the European Commission in Brussels said today. That's the lowest since October 2009 and below the 91.9 forecast by economists. A gauge of sentiment among European manufacturers fell to minus 11.3 from minus 9 in April, today's report showed. That's the lowest since February 2010. An indicator of services confidence dropped to minus 4.9 from minus 2.4, while a gauge of consumer sentiment rose to minus 19.3 from minus 19.9. Sentiment in the construction industry also declined this month. Italy's bond yields surged to a four-month high as the nation missed its maximum target for sales of five- and 10-year securities. German two- five-, 10- and 30-year government bond yields fell to record lows. Spanish bonds slumped, driving five-year yields to more than 6.0% for the first time since November. The Italian 10-year yield advanced 18 basis points, or 0.18 percentage point, to 5.95 percent early today; the rate reached 6.01% before bouncing, the highest since Jan. 31. German 10-year yields fell five basis points to 1.32% after dropping to 1.304% before a bounce, the least since tracking the data in 1989. German two-year yields slipped to 0.01%, five-year yields declined to 0.383%, while 30-year rates slid to 1.849%, all the least on record for the securities. About 7:00 am this morning news wires reported the European Commission called for direct euro-area aid for troubled banks and touted common bond issuance as an antidote to the debt crisis now threatening to overwhelm Spain. The current EU plans call for the 500 billion-euro European Stability Mechanism, set to start up in July, to funnel bank-aid money through national governments and, ultimately, require those governments to pay it back. The commission appealed for a "banking union" that would more tightly integrate supervision and create a pool of European funds to clean up banks with cross-border exposure and segregate their underperforming assets. The "new" plan being floated calls for direct loans to troubled banks and not through governments; it is being opposed by Germany however. The German view is that lending to banks directly instead of through governments would lessen the moves to austerity in spending. All Europe's stock markets are getting hit hard this morning on increasing lack of confidence in the region and the inability of Italy to sell its debt. Money continues to flow to safety, into German bunds and US treasuries. US interest rates trading higher than German rates; the German 10 yr bund at 1.32% compared to US 10 yr treasury at 1.66% keeping demand high. In China today the government said it won't inject stimulus at the pace it did in 2008 as its economic growth is expected to decline to +8.2%, also helping drive global rates lower. Mortgage applications decreased 1.3% from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending May 25, 2012. This week's results do not include an adjustment for early closings on Friday before the Memorial Day holiday. The Market Composite Index, a measure of mortgage loan application volume, decreased 1.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 1.6 percent compared with the previous week. The Refinance Index decreased 1.5 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.6 percent from one week earlier. The unadjusted Purchase Index decreased 1.8 percent compared with the previous week and was 3.9 percent lower than the same week one year ago. At 9:30, in line with Europe's markets, the DJIA opened -110, NASDAQ -29. The 10 yr at 9:30 1.66% -9 bp frm yesterday and taking out resistance at 1.70%; MBS 30 yr prices +10/32 (.31 bp). The only data today; April pending home sales, expected up 0.2%, fell 5.5%; yr/yr sales +14.4%. Pending sales are contracts signed but not closed; cancellations led to the decline as appraisals and credit problems continue to eliminate potential buyers. The stock indexes weakened more and the rate markets improved slightly on the report. Limbo, Limbo. How low can they go? How bad will things get in Europe's financial crisis, and how deeply will Europe drive global economies down? The US 10 yr is now technically set to test the next resistance at 1.60%. As long as German 10 yr bunds fall it will drive US rates down with it as US rates continue to trade at higher rates. That said, it is the moving target and completely depends on the deteriorating outlook in the EU's ability to work out a solution to its debt and growing problems in the banking sectors. Germany is the key; will it step up and take the leap to save the day as it did with east Germany? So far Germany is unwilling to take on the challenge.