Bonds Rise and the Fed Holds

U.S. 10-year Treasury bonds rose today, after the
Fed kept rates unchanged at 5.25%. Traders fully expected the central bank
to keep rates the same, so most investors were focused on specific wording that
the Fed used. A U.S. GDP report came in much better than expected;
analysts were looking for 3% growth in Q4, but the GDP report showed a 3.5%
increase in growth. Bond prices initially shot higher when the Fed first
paused the string of hikes in late June on slowing growth and moderating
inflation. Investors began to speculate that the Fed would be forced to
cut rates by March, but a string of turn-around reports since December have
instilled a burst of confidence in most investors. Prices have been moving
steadily lower since December. Bond prices usually fall on economic
strength and rise on weakness.

The dollar fell against the yen and the euro
today, after comments from Treasury Secretary Paulson suggested that the G-7
committee meeting next week would be focused on yen weakness. The yen has
fallen to record lows against the euro, and to yearly lows against the dollar.
Consistent low-growth reports from Japan have left the yen at a severe
disadvantage against the other two major currencies. The international
currency market favors currencies backed by inflationary, high-growth economies,
which Europe has proven itself to be. The U.S. has surprised many
investors on a string of turn-around reports starting in the beginning of

Crude oil rose 2% to close just over $58 a barrel
today, on expectations that continued cold weather and economic growth should
keep demand steady. Oil fell through the second half of 2006 from record
highs, falling as much as 34%. However, recently oil has pushed back on
cold weather and U.S. plans to double its strategic oil reserve. High GDP
numbers also boosted expectations that high demand in the U.S. should continue
into the future. Natural gas fell about 1% on high inventories.

Gold rose just over 1% during today’s session, on
dollar weakness and rising oil. Gold usually trades inversely to the
dollar and with oil, which is exactly what happened today. Investors turn
to gold as a safety in the face of dollar weakness and rising energy prices.
Weakness against the euro led many investors to buy gold to cover dollar
positions. Copper prices rose just over 1% today, on supply concerns
stemming from a strike in Chile.

Grains traded mixed today. Corn was flat
with a small daily range, soy fell fractionally, and wheat rose nearly 2%.


The U.S. Fed kept
its benchmark interest rate at 5.25% today.

U.S. GDP grew 3.5% in Q4 2006, more than
analysts expected.

John Lee

Associate Editor