Bonds Bounce from Extended Lows

U.S. 10-year Treasury bonds staged a bounce, after falling dramatically over
the past two days on widespread sentiment that the Fed will not cut rates any
time during this year. Investors speculated that the bounce today was merely a
correction, after weeks of steadily falling bond prices. Bonds began to drop in
May, on a string of turnaround economic reports and hawkish Fed comments. There
is widespread consensus amongst traders that with U.S. growth rebounding and the
economy picking up steam, the Fed will not be able to cut rates any time before

The dollar moved to 5-year highs over the yen, but stalled against the
euro today to close flat. Traders attributed yen weakness to the resumption of the
carry trade, which has become more profitable in the last few weeks on rising
global interest rates. As interest rates around the globe keep going higher,
Japan’s rate looks to stay the same, and traders are borrowing the yen and
investing borrowed currencies into more profitable assets. The euro also bounced against the yen, which could also be attributed to a
widespread resumption of the carry trade. The dollar was near flat against the
Canadian, after giving up some gains from early in the day.

Oil rose 1.5% today, after the Energy Department released supply numbers
that fell short of analyst expectations. Analysts were looking for a gain of
1.5 million gasoline barrels, while there were only 3,000 actually added. The
missed numbers helped to stir up feelings that oil prices will move higher
this summer, and that current reserve supplies will not be able to handle the
spike in demand. Crude prices and demand usually rise in the summer. Natural
gas futures fell 1% on expectations that tomorrow’s inventory report will show
a gain.

Gold futures were basically flat on the day. Gold has been falling as
interest rates rise, as traders sell gold to enjoy the safety of high yields
in U.S. bonds. Gold usually trades inversely to the dollar and with oil, but
lately gold has been trading inversely to interest rate movements. Copper
futures jumped 0.8% on strike worries in South America.

Grains were mixed, but mostly higher. Soybeans fell fractionally, but corn
jumped nearly 3% and wheat rose over 4%.


Retail sales rose 1.4% in May, versus
expectations of 0.7%.

John Lee

Associate Editor