The morning started with sentiment strong in the bond markets in anticipation of more positive headlines leading up to Thursday's European summit.

By the afternoon, stocks and credit spreads pared back some of their gains as rating agency Standard & Poor's placed all 17 Euro member countries on downgrade watch.

The Euro got slammed closing under 1.34 against the U.S. dollar.

That the market reacted so suddenly to a headline that should have been expected (or at the least that should certainly have come as no surprise to market players) confirms one thing: liquidity is getting thinner as we approach year-end.

Headlines, whether market positive or market negative, will push securities prices around with little resistance as if in a vacuum (a familiar feeling to connoisseurs of the game air hockey).

Taking a step back, credit spreads have rallied substantially over the past week in line with this letter's expectation of a year-end technical rally.

Credit spreads may tighten further but are likely to trade sideways as we approach the last two weeks of December when trading volumes are slated to be extremely light.

Treasury bonds are the most obvious beneficiaries from thinning overall market liquidity.

Any kind of headline uncertainty is also going to strengthen the safe harbor bid for Treasury bonds; bond yields on the 10 year benchmark Treasury will likely continue to march tighter.

It will be a quiet calendar this week; University of Michigan consumer confidence numbers will be out on Friday.