Stocks traded weak, Treasury bonds rallied, yet corporate bonds were little changed as players sat around waiting.

The explanation for the market's relative lethargy is that players fear that a relief rally will be fierce, yet they are almost forced to hedge themselves against an adverse resolution of the U.S. debt ceiling saga.

The U.S. dollar lost ground against the Euro to close near the lows of 1.45.

Once the debate around the U.S. debt ceiling is resolved players will re-focus on the European situation; the Euro looks frothy at these levels.

The repo markets appear to be doing well considering the potential systemic disruptions that lie ahead; the market consensus appears to be that the threat of a U.S. debt downgrade will have a minor impact on the repo market.

There are no players pulling out of the market.

Haircuts may cause a general cheapening but no major dislocation; nothing like what happened with the Lehman situation in 2008.

With current repo haircuts in the 2% range for 10 year debt; haircuts can go up to 4%, the net effect would be to reduce leverage in the system (not a bad thing) and the increase would still be well within the normal range.

With a debt downgrade, municipal financing deals could be affected by downgrade triggers, margin and substitution clauses.

Government-backed student loans could also take a hit as many investors require AAA-ratings on these securities.

In the event of a disruptive downgrade, however, regulators are likely to ride to the rescue; that's what the ECB (European Central Bank) did at the onset of the European sovereign crisis.

The risks to the real economy would remain the same both before and after any ratings downgrade: high unemployment and too much monetary stimulus at the expense of fiscal policy.

On the bank funding side, US banks are deposit heavy and no longer as reliant on short term funding via Commercial Paper, Certificates of Deposit, and / or repo transactions as they were before Lehman in 2008.

In short, anyone betting against the U.S. government can expect to pay some serious mark-to-market losses through the nose (and if the bet pans out, they may get a nasty surprise from the Internal Revenue Service or the Securities & Exchange Commission).

Stay tuned for Speaker John Boehner's deal proposal tomorrow; Representative Boehner made a lot of sense in his televised address.

Amazon came out with gangbuster earnings after the market closed; so far more than three-fourths of companies that have reported earnings have beat expectations.

This bodes well for corporate bonds; investors are slowly shifting out of financial paper and into the corporate realm.

Today's $750 million 5 year machinery giant Caterpillar bond issue at +62 (spread over benchmark Treasury) saw heavy demand from investors; considering the overall backdrop these bonds should trade well in the secondary markets.