Bonds Rocket Higher on Equity Weakness

U.S. 10-year Treasury bonds rose the most in one day since 2004, as U.S. equities took a major hit today, with the Dow falling more than 3% during the day. Major equity weakness led traders to keep selling stocks, in favor of the safety of long-term bonds. Traders bought bonds as a safe-haven from equity risk. Bonds normally rise on economic weakness and fall on demand. Previously, the housing slowdown and subprime problems were sending bonds higher, but coupled with equity weakness, bond prices soared today on widespread negative and panic sentiment.

The yen gained against the dollar and the euro today, as equity weakness around the world prompted traders to unwind the carry trade. Traders bought back yen they had previously borrowed, in order to cover riskier positions in other assets. The so-called carry trade has been a strong catalyst for big moves for the yen, as equity weakness has led to major yen strength a few times since the beginning of the year. The yen has been gaining whenever global stocks slide considerably. The euro also resumed its trend against the dollar, after slipping yesterday.

Crude oil futures fell about 1.4% today, on speculation that the recent, month-long rally to prices well above $70 a barrel was overdone. Traders speculated that extended rally conditions led to a small pullback. Equity weakness could also have contributed to oil selling; a weak economy usually will equate to weak energy demand. Natural gas futures rose about 0.6% ahead of the worst part of the U.S. hurricane season.

Gold futures fell nearly 2% today, on worries that a slowing U.S. economy will reduce demand for the safety metal. Gold normally trades inversely to the dollar and with oil, but today gold moved against its normal trend. Despite a falling dollar, gold fell as well, as opposed to gaining as traders exit the dollar. Copper futures fell nearly 1% on slowing growth concerns.

Grains rose today. Soybeans gained 0.8% and corn rose just over 2%.

Stocks plunged in Thursday's session with the Dow giving up nearly 450 points briefly before finishing down 311 points. This was the worst one day drop of the year, which caused investors to move money into bonds. The early selloff was fueled by new home sales data that continued to be disappointing. Click here for the rest of today's Stock Market Recap.

John Lee
Associate Editor
johnl@tradingmarkets.com

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