Bonds Hit Lowest Levels in Over a Year

U.S. 10-year Treasury bond prices fell to the lowest prices in over a year,
on further speculation that the U.S. will not cut rates this year, and that
global interest rates will rise this year on inflation and economic growth.
Since the beginning of May, U.S. bond prices have been falling steadily on
widespread sentiment that the Fed is in no position to cut rates this year. The
government has released a string of turn-around reports, and the Fed’s wording
during the May announcement came across hawkishly to most traders. Bonds fell
further today, on the expectation that major reports due out at the end of this
week will help to bolster strong U.S. economic sentiment.

The dollar moved to 2-month highs against the euro today, on rampant
speculation that the Fed will hold rates at 5.25% through the year. Earlier
this year and late last year, traders were betting that the Fed would be
forced to lower rates to deal with slowing growth. Traders today, however, are
betting on U.S. economic strength, on a string of turnaround economic reports
and hawkish language from the Fed, which started around early May. The euro fell against the yen today, after dropping fractionally
yesterday. A weak industrial production report helped to push the euro lower.
The British pound rose on the dollar today, after hawkish comments from the
BoE Governor. Also, the dollar managed to bounce against the Canadian dollar,
after a string of weakness.

Crude oil futures fell 1% today, on speculation that tomorrow’s Energy
Department report will show an increase in U.S. fuel inventories, as
refineries have opened back up across the country. Summer is typically a
period of high demand and high prices for energy, and refineries usually shut
down ahead of the season for cleaning and repairs. With summer in full swing,
and refineries back in gear, traders bet that tomorrow’s report will show that
U.S. fuel stockpiles will have risen in the last week. Natural gas futures
rose about 1% today.

Gold futures fell 1% today, on speculation that high interest rates will
drive away safety investors of the metal. Gold usually trades inversely to the
dollar and with oil; dollar action contributed to gold’s decline today, but
the real story remains high interest rates. Traders fear that the
attractiveness of gold as a safety investment will lessen as bond yields
become more and more profitable. Copper fell 2% on China demand worries.

Grains traded mixed today. Soybeans fell 0.4%, corn dropped -0.6% and
wheat gained 1.7%.


No major economic news to report for the U.S.

John Lee

Associate Editor