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Bond markets have effectively called the bluff of this morning's Fiscal Cliff headline suggesting that Obama would, today, offer a scaled-back Fiscal Cliff proposal. The initial burst of selling was the knee-jerk reaction and cooler heads quickly realized this offers no additional information beyond yesterday's rumors (CNN story and Scott Brown's Facebook posting) that Obama was offering a scaled-back deal. Consensus is shifting towards can-kicking.

10yr yields are off their 1.7165 highs, but only down to 1.711 currently. S&P's have dialed back 4 points from their highs and MBS showed are currently up 3 ticks at 104-28, roughly mid-range on the day.

A few conclusions:
1. It will take something meatier by way of Fiscal Cliff headline to cause wholesale panic in bond markets.

2. Simply ruling out wholesale panic doesn't mean we can rule out additional, moderate weakness between now and "meatier" headlines.

3. The correction greatly reduces any previously increasing risks of negative reprices among lenders who were out early enough with rate sheets. However, we're not seeing a triumphant stampede back to stellar levels, so we'd stay tuned and stay guarded against volatility as the afternoon approaches.

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• Mortgage Rate Watch: Mortgage Rates Jump Back To Recent Highs, More Volatility Ahead
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