The U.S. debt ceiling deal finally passed muster with lawmakers but stocks tanked with the S&P stock index closing -2.6% lower.

Treasury bonds rallied hard (the yield on the 10 year closed at 2.61%) and corporate credit spreads, particularly in cash financials, widened out aggressively.

What happened?

Most are probably scratching their heads and wondering why the market did not rally.

To any diligent reader of this letter the market's reaction was not a surprise.

Corporate credit spreads have been trading far too tight for far too long; a re-pricing in corporate and financial spreads was only a matter of time.

As for U.S. Treasury bonds, in times of stress investors stage a flight to quality.

With the ugliness in Europe continuing unabated U.S. government debt looks that much more attractive; Italian bonds were almost a point lower again today.

As for stocks, the weak macroeconomic backdrop weighed in; stocks have been trading at frothy levels ever since quantitative easing (the Federal Reserve printing money) temporarily hid the real recession from view.

Not to mention (first mentioned in this letter last week) that some of the savvier hedge funds saw this convergence coming and shorted stocks vs. getting long Treasury bonds.

It was the classic "heads I win, tails I win" trade.

Meanwhile Gold breached the $1,650 an ounce threshold to close at $1,662.

Players will be watching developments in Europe closely; by all accounts, it is ugly with investors hitting bids for bonds in full force.

Players will also be watching economic releases that come out this week leading up to unemployment and payroll numbers on Friday.