Whereas Thursday's session was characterized as a bit tricky due to the uncertain balance of importance between economic data and pervasive Fiscal Cliff issues, Friday is a bit more straightforward, even if more prone to volatility.  The reason for this is the failure, late Thursday night, of the House to pass the so-called "Plan B" tax and spending bill which served as a counteroffer to the President's offer.

Markets immediately moved  in a "risk-off" direction with huge selling in equities futures and substantial gains for bond markets.  While this is nice to see for fans of low rates, it's no guarantee of the domestic reception this morning.  So, in the sense that today's focus will be on trading the consequences of that failure, it's a straightforward session, even if we don't know how it will shape up.  

The fact that it's still not 2013, and that the House may get back to work on new plan as early as the 27th means that uncertainty over the outcome is likely to keep a lid on an outburst in either direction.  The moves seen in the overnight session, however, give us a hint as to how such outbursts might play out.  Bond markets are likely to benefit from Fiscal Cliff failure, at least as far as the initial reaction is concerned.

We'd have to imagine that if Thursday night's news hadn't just been about the House's failure, but also contained imaginary headlines indicating that both sides had given up completely and had signed legislation immediately enacting sequestration and tax hikes that stocks would fall a quick 5% and 10yr yields would drop into the high 1.5's.  The more difficult question is how much higher would Fiscal Cliff SUCCESS push bond yields and stock prices?  "Buy the possibility, sell the disappointment?"

Whatever the case, we now look exceedingly likely to hold the upper limits of the recent range in 10yr yields through Christmas break, but whether or not it comes under threat late next week, is anyone's guess.  The following chart was snapped at midnight (ET) and at that time, 10's were seeing resistance to moving below 1.75, a benchmark level that would probably result in Fannie 3.0s moving well into the 104-20's in the domestic session.