Benchmark interest rates continued to move higher overnight in response to news that a compromise had been achieved on both the extension of  Bush era tax cuts and unemployment benefits. Fundamentally this agreement is seen boosting GDP growth and potentially aiding job creation, which one would assume is a positive for stock markets but the major equity indexes were unable to maintain their rally yesterday. Our analysts point out that both the tax cut  and unemployment benefits extensions were likely already baked into the stock valuations as the market has gained nearly 3% since Nov. 29. S&P 500 futures are however higher this morning, currently +2.50 at 1225.75. Dow Futures are  2 points lower at 11,353.

The dollar index is +0.29% at 80.091. Light crude oil is trading flat at $88.70 per barrel ― down from a two-year high Tuesday ― while gold prices are 0.75% lower at $1,390.31 per ounce.

The 10-year Treasury note is 15/32 lower in price and 5.9bps higher in yield at 3.20%. The 2s/10s yield curve is UNCH at 261bps wide. The Fannie Mae 4.0 MBS coupon has ticked below parity and is currently -14/32 at 99-16. The Fannie Mae 4.5 MBS coupon is -12/32 at 102-18.  In the past 52-weeks, the yield on the 10-year note has ranged from a low of 2.385% on Oct. 7 to a high or 3.986% on April 5. .

“Even the mid-portion of the curve (where the Fed is focusing its asset purchases) is under intense pressure, as the extra fiscal stimulus reduces the odds of QE3,” said economists at BMO Capital Markets.”

BMO noted that Irish bond yields continued to ease. “It looks like its parliament will pass the proposed austerity budget, allowing the country to start receiving up to €85 billion in bailout funds from the EU and IMF.”

The day ahead is light on data, but there’s plenty of news for investors to trade on including reports of renewed tension in North Korea and, at home, Obama’s compromise with top Republicans to extend Bush-era tax cuts.

Key Events Today:

7:00 ― The just-released weekly MBA Mortgage Applications index said loan application volume fell 0.9% in the week ending Dec. 3, as the average contract rate for a 30-year mortgage moved up 10 basis points to 4.66%

Refinancings fell 1.4% in week, marking the fourth straight fall to its lowest level since June. But purchases increased 1.8%, the third consecutive increase to put the index at its highest level since early May. 
The four week moving average for the overall index is down 8.0%. Refinancings currently make up 75.2% of all new mortgages.

Economists at BMO noted that mortgage applications have ticked higher in six of the past seven weeks, suggesting housing demand is recovering. 

“And, it’s not just mortgage credit that has turned higher,” they noted. “Late yesterday it was reported that consumer credit rose for the second straight month in October after 19 consecutive declines. This likely explains the surprisingly strong holiday-shopping season.”

10:15  ― Fed buys $1-2 billion TIPS maturing between 07/15/12 - 02/15/40

Treasury Auctions:

  • 1:00 ― 10-Year Notes ($21 billion)