<span style="font-size: 10pt; font-family: Arial, sans-serif; ">More selling in the treasury and mortgage markets again today taking the 10 yr note to 1.77% where the 200 day average resides (1.78%).</span><span style="font-size: 10pt; font-family: Arial, sans-serif; "> MBS prices early were down 21 bps from yesterday after declining 24 bps yesterday. The technical picture has changed to bearish, however with the recent volatility it is still too soon to believe that rates have finally bottomed and will continue to increase. This morning it isn't the stock indexes that are driving rates higher, at 8:45 the DJIA up just 4 points. The push to higher rates is being driven by much better economic reports (retail sales, improvement in the housing market outlook) and relaxation over debt problems in the EU. Spain's bond market is better on increasing belief it will ask for assistance frm the ECB to buy its bonds in the open market. Interest rates have been driven down on a weakening US economy and safety moves against the potential of debt defaults in Italy and Spain; presently those are off the table.</span>

This morning at 8:30 more solid news for the housing sector. Sept housing starts were expected up 2.4% to 768K units (annualized); starts jumped 15% to 872K units. Sept building permits were thought to be up 1.5% to 815K units, permits exploded 11.6% to 894K. Starts were up to the highest levels in 4 years, the best since July 2008, more evidence that the sector is recovering. The number of permits increased by 45.1% since September 2011, the biggest annual jump since 1983.

Construction of single-family houses jumped 11% from August to a 603,000 rate. Work on multifamily homes, such apartment buildings, increased 25.1% to an annual rate of 269,000. Yesterday the Oct NAHB housing market index increased for the fifth consecutive month in a row. Hard to argue that housing isn't recovering given the recent data.

Spain's government bonds advanced, pushing 10-year borrowing costs to the lowest in more than six months, after Moody's Investors Service said it would keep the nation's credit rating at investment grade

Italian and Portuguese securities also rallied amid optimism the euro region is making progress to contain the debt crisis. Moody's cited a reduction in the risk of Spain losing market access because of the European Central Bank's willingness to buy the nation's bonds. German 10-year bunds fell for a third day (price); the yield climbed seven basis points to 1.61%, the highest level since Sept. 21. Spain's yield fell 29 basis points, or 0.29 percentage point, to 5.52%. The EU summit meeting begins tomorrow.

At 7:00 this morning the weekly MBA mortgage applications data: purchase applications are on the rise, up 1.0% in the October 12 week for a fourth straight gain and at its best level since June. This index is pointing to strength for underlying home sales. The refinance index, which has been near three year highs, fell back 5.0%. Rates remain extremely low, at 3.57% for conforming loan balances ($417,500 or less).

At 9:30 the DJIA opened -39, NASDAQ -10, S&P +1. The 10 yr at 1.77% +5 bp while 30 yr MBS price -6 bp in volatile trading so far this morning (-27 bp at one point this morning).

There isn't anything on the calendar for the rest of the day.The bond market is testing critical longer term technical levels; the 200 day average is at 1.78%, the 10 briefly hit it then backed down to 1.77%. The 200 has held selling two times, the first on 8/20 and the second on 9/13; in both cases the 10 yr note then launched strong rallies. Will the 200 hold the rate again? If not the 10 is likely to continue to work up to 1.88% to the next resistance level. MBS's will follow, don't be taken in that just because the Fed is buying $40B a month of MBSs that mortgage rates will diverge from the direction of treasuries. The MBS market is technically stronger than treasuries on the Fed buying, this morning holding its support level at 104.69 bp.