Bonds Fall Most in 3 Years

U.S. 10-year Treasury bonds fell the most in 3
years today, and traded at 11-month lows. Bonds fell today after New Zealand
raised interest rates unexpectedly, fueling speculation that other central banks
around the world will begin raising rates to contain inflation. Bond yields
plummeted on popular sentiment that the Fed is in no position to lower rates
this year, with inflation levels where they currently are. Bonds have fallen
steadily since the beginning of May, when the Fed held rates at 5.25% and
promised to continue monitoring inflationary pressures.

The U.S. dollar rose against the euro and the
yen today, on speculation that the Fed will not cut rates any time soon.
Despite a string of negative sales reports from major retailers in the U.S.,
the economic outlook for growth continues to turn to the positive. Falling
bond prices are helping to boost the dollar, as more and more traders bet that
the Fed will not cut interest rates this year. The yen rose against the euro
and fell against the dollar. However, the yen did make back some gains against
the dollar as the day went on. The dollar managed a bounce against the
Canadian dollar.

Crude oil futures rose 1.3% on continued
speculation that the recent drop in refinery operation has seriously affected
U.S. reserves, ahead of a period of high demand. Summer usually equates to
high levels of energy usage and rising prices, so any change in the
government’s reserves affects prices significantly during this time.
Unexpected refinery shutdowns, in addition to planned ones, have led traders
to bet that U.S. reserves will not be able to handle the spike in demand that
usually accompanies summer.

Gold futures fell 1.4% today, on concern that
globally high interest rates will slow demand for the safety metal. The dollar
also gained over the euro, which helped to dampen gold demand. Gold usually
trades inversely to the dollar and with oil; today’s dollar action and
interest rate worries led to gold selling. Copper futures were flat today,
after rising yesterday.

Grains were mixed today. Soybeans fell 0.7%,
wheat dropped 1.4% and corn rose 2%.


U.S. initial
jobless claims fell 1,000 last week.

John Lee

Associate Editor