Stocks and bonds continue to march to the beat of an oil drum. HA I crack myself up.....oil prices did dictate the directionality of stocks and bonds in overnight trading though.

Oil prices ticked lower yesterday afternoon on rumors that  Libyan leader Muammar Gaddafi was planning on stepping down. Those whispers were however squashed, leaving the door open for light crude  to continue its climb higher, which it did promptly as London opened for trading.  NYMEX Crude is currently off its overnight high of 105.43, but prices are once again on the rise. NYMEX Crude is -0.04at 105.40.

As oil prices rose in the 3AM hour, stock futures slowly deflated and while interest rates moved mostly sideways in light trading volumes, flows were generally skewed in favor of better buying. S&P futures are currently -0.50 at 1308.50. The benchmark 10-year Treasury note is +5/32 at 101-02 yielding 3.497%. The March delivery FNCL 4.5 MBS coupon is +2/32 at 101-28. The 2s/10s yield curve is 2bps flatter at 280bps wide.  The dollar index is +0.43% at 76.826.

OVERNIGHT NEWS HEADLINES...

Libyan Official Denies Talk of Gaddafi Exit: (Reuters) - A Libyan foreign ministry official on Tuesday denied Tripoli had floated a proposal under which leader Muammar Gaddafi could step down in exchange for guarantees about his future. The official, an advisor to the deputy foreign minister, said reports about such a deal were "absolute nonsense." Gaddafi's opponents in rebel-held east Libya said they received a proposal to discuss Gaddafi's exit but rejected it. (Reporting by Michael Georgy)

OPEC mulls boosting output, Iran sees no need: (Reuters) - OPEC oil producers are consulting about a supply boost but many in the group remain skeptical, saying high prices are due to fears of shortage and world supply is comfortable despite the loss of Libyan crude. "We are in consultations about a potential output increase, but have not yet decided," Kuwait's Oil Minister Sheikh Ahmad al-Abdullah Al-Sabah told reporters on Tuesday. OPEC oil ministers have said there was no plan to meet ahead of the group's next scheduled gathering in June. Iran holds the OPEC presidency, a coordinating role rotated annually.  Its OPEC governor Mohammad Ali Khatibi downplayed speculation of more OPEC oil. "There is no shortage in the market," he told Reuters. "There is no need for further OPEC supply. But the consumers are worried, this is psychological."

NFIB Small Business Optimism Index - Hiring Plans Improve: The Index of Small Business Optimism gained 0.4 points in February, rising to 94.5, not the hoped-for surge that would signal a shift into “second gear” for economic growth. Gross Domestic Product (GDP) growth in the fourth quarter was revised lower due to a large fall off in inventory building and weaker consumer spending than initially estimated. “Weak sales” still get the most votes by owners as their top business problem. Seven Index components advanced or were unchanged and three fell, but all of the changes, positive or negative, were small.  Most notably, hiring and future plans to hire were solid and hopefully presage a string of steady job creation months this year. While historically weak, these relative gains signal good news for a sector still deeply encumbered by weak sales. Still, only a net 9% of small business owners surveyed expect that business conditions will improve over the next six months. “This is not a reading that characterizes a strongly rebounding economy,” said NFIB chief economist Bill Dunkelberg. “But it is the third best reading since the fourth quarter of 2009 when the economy was expanding rapidly. So, it gives us cause for some real optimism. Apparently the future is looking brighter for a few more small-business owners, although much will depend on what Congress does this year.

KEY EVENTS IN THE DAY AHEAD...

10:00 -  Senate Banking Committee holds hearing on nomination of Peter Diamond to be a member of the Federal Reserve Board of Governors

10:15 - The New York Federal Reserve's trading desk will purchase an estimated $6-8 billion in Treasuries maturing between 09/30/2016 – 02/28/2018

1:00 - Treasury will auction $32 billion 3-year notes.

MBS WATCHER ALERT: Class A MBS Coupons (Fannie and Freddie 30s) begin the monthly settlement process.

It's a day trader's delight out there.......