Not a good start this morning in the bond and mortgage markets; European stock markets better leading to better US stock index prices in the futures markets prior to the open at 9:30. Late yesterday afternoon MBS prices declined from what we reported at 4:00; at 4:00 30 yr MBS price was +23 bp, at 5:00 +12 bps. This morning the 10 yr note yield at 9:00 1.94% +3 bp frm yesterday's close. As we noted yesterday, the fall in US interest rates over the last four sessions was caused by renewed concerns in the EU, re-ignited by banking problems in Cyprus. It was all a safety run into treasuries and German bunds, fears of Cyprus banks failing and the potential that other EU countries may also be pulled into a plan that has shaken global markets temporarily.

The ECB and IMF told Cyprus that it must raise 10B of euros to get help for its banking system; the initial Cyprus plan called for taking money from bank depositors to come up with the necessary capital. The Cyprus parliament yesterday voted against tapping depositors' money. Now Cyprus is trying to get Russia involved by selling part of its banks to them, much of the deposits in Cyprian banks is Russian money. Meantime officials in the EU, ECB and IMF are not softening their tones about letting the country fall and exit the EU. The safety trade that sent the US 10 yr note rate down 12 bps since last Friday has cooled; rates today higher and the stock market opening very strong. Whether the Cyprus issue is a one and off problem is still in question but the fear factor has apparently ebbed for the time being. We noted in yesterday's afternoon report that it was a possibility, and that if fears subsided interest rates would likely increase.

The DJIA opened +60, NASDAQ +24, S&P +8; 10 yr note at 9:30 1.95% +4 bp and 30 yr FNMA price -15 bps.

This morning the weekly MBA mortgage applications data for the second week in a row was soft. The overall composite index declined 7.1% after falling 4.7% last week. The purchase index declined 4.0% after declining 3.0% last week, the re-finance index dropped 8.0% after dropping 5.0% last week. MBA said the continuing rise in mortgage rates is a major factor in the weakness in mortgage applications with the average 30-year mortgage for conforming loans ($417,500 or less) at 3.82% for a one basis point increase in the week. It takes consumers time to realize mortgage rates are not unlikely to decline, and to accept it as reality that the likelihood of higher rates is stronger than for declining rates.

At 2:00 this afternoon the FOMC will release its policy statement. The statement will likely not change much frm the last meeting; economic recovery continuing but slowly, unemployment improving but not quick enough for the Fed to think of ending its QE support for the bond and mortgage markets, the housing sector on the path of recovery.

At 2:30 Ben Bernanke will hold a press conference; likely a lot of interesting questions will be forthcoming for reporters. Bernanke will have the opportunity to be more specific than what the policy statement reveals 30 minutes earlier.

The EU with the banking crisis in Cyprus is still a factor, however unless there is constant negative news frm the region the safety trade won't likely stand long. Europe's stock markets are better and at least today, ignoring the new so-called crisis. The US stock market also ignoring it. The ECB is standing firm at the moment that Cyprus will have to come up with 10B euros before it gets more bailout funds; markets though appear to be discounting the tough talk and believe in the end the ECB, IMF and EU officials will eventually give in and keep the country from a banking collapse. Investors are also less concerned today that Cyprus's issues will not spread to larger EU countries (Italy, Spain and Portugal).