A little better start in the mortgage and bond market this morning even with the stock indexes opening better. It remains all about the Cyprus banks and whether Cyprus can come up with 5.8B euros in order to get bank rescue money from the ECB. Yesterday the gauntlet was laid down to Cyprus by the ECB and EU officials; raise the money by Monday or the rescue is off. Tough talk as there has been in the past, but in recent past crisis's in Spain, Italy and Portugal the deadlines were achieved in various forms to avoid any systematic EU meltdown. Will it be different this time? Markets are taking the Cypriot banking crisis in stride so far, no massive runs in Europe's stock markets, the US stock market holding well and while there has been a certain amount of safety moves into US and German bond markets, the amount hasn't been extreme.

Why so much angst over a country with very small population and not a major economic contributor to the EU? Unless Cyprus stays in the EU there is speculation that even if one country is allowed to exit the Union, it would set a precedent for other members to walk away. Keeping the 17 member EU intact is seen as critical to the future cohesiveness of the entire Union. Allowing one country to leave, even a tiny one like Cyprus, is seen by many to represent a crack in the entire EU. No one really knows for sure what the consequences would be if it is forced out but as in all past episodes over the last three years in the region, the worst case scenario dominates thinking. Based on the latest info, according to the troika, Monday is the deadline for Cyprus to raise 5.8B euros. What happens if the country doesn't is the unknown keeping markets on edge.

At 9:30 the DJIA opened +25, NASDAQ +13, S&P +5; 10 yr note at 1.92% unch and 30 yr MBS price +9 bp frm yesterday's close.

There are no economic releases today and little expected news other than what may slip out from Europe. It should be a quiet session ahead of Monday's supposed deadline for Cyprus and possible additional news over the weekend. In Germany Angela Merkel told a closed-door meeting of legislators in Berlin today that she's annoyed the Cypriot government hasn't been in touch with the so-called troika of international creditors for days. She vented a little more anger than she has in the past, saying Cyprus is testing the EU's resolve and it isn't acceptable.

The main reason US interest rates have declined somewhat over the last few days is about safety. The move of money into safe havens though, has not been dramatic compared to panic moves into US bonds as in the past upheavals over the last couple of years. The US stock market, although not rallying, is holding well. The take away is that for all the talk and fears being vented over Cyprus, so far it is mostly talk with not much investor reaction. If the crisis is avoided markets will return to more direct fundamentals; the economy and normal issues that are always present. The US economy is strengthening, the bond and mortgage markets outside of the recent Cyprus situation, hold slightly bearish biases. We still hold that interest rates will not increase much over 2.00% and that rate markets will not decline much----unless the EU is seen as unraveling, and isn't likely.