Bonds Sink on Equity Rally

U.S. 10-year Treasury bond prices fell for the second straight day, after rallying during the beginning of the week, on speculation that equity strength is indicative of the economy's strength. Bonds shot higher early in the week on expectations that the subprime lending problems would spread to other areas of the economy and trigger a widespread slump. Stocks slid through the early part of the week, and bonds rose on general fears of an economic slowdown. However, with the equities market rebounding solidly into the green, bond prices are falling steadily.

The dollar fell to new lows against the euro today, and was flat on the yen, as more and more traders speculate that the U.S. subprime mortgage lending problems will spread to other areas of the economy. The subprime lending sector has taken a major hit over the last few months, with a number of major U.S. companies taking massive losses as more and more debtors defaulted on their loans. Housing worries also continue to plague the U.S. dollar, with traders betting that the housing decline is not over, and that those problems could spread as well. The euro also moved to new highs against the yen. The dollar slipped against the Canadian dollar, but gained on the British pound.

Crude oil closed down fractionally, giving up moderate gains to close near flat. There was no major news save a refinery shutdown in the Midwest, that should be up and running next week. Crude prices usually rise during the summer, as the hot weather leads to more demand and energy usage. Natural gas futures fell nearly 3% on rising inventories.

Gold futures rose nearly 1% today as the dollar fell to new lows against the euro. Gold usually trades inversely to the dollar and with the euro; today's dollar weakness led to major gold buying, as traders bought gold as a safety. Copper futures dropped just over 1% on speculation that the recent rally was overextended.

Grains traded higher today. Soybeans rose just over 2%, and corn gained 2.2%.

John Lee
Associate Editor
johnl@tradingmarkets.com