Bonds Rise on Fed Statement

U.S. 10-year Treasury bonds rose today, after the
Fed kept rates at 5.25%, and traders increased bets that the Fed would lower
rates by June. Traders interpreted the announcement’s wording as a door to
open up the possibility for future cuts. Bloomberg reports that the Fed
said, “Future policy adjustments will depend on the evolution of the outlook for
both inflation and economic growth,” meaning, in effect, that rate cuts will
happen if the market necessitates them. Watch for housing to remain a key
economic indicator, as the ramifications of the subprime meltdown continue to
spread through the market. Interest rate futures for the June Fed meeting
show a 40% chance for a cut, compared with a 26% chance yesterday.

The dollar fell against the euro today, and rose
slightly against the yen, after the Fed held rates, but noticeably relaxed
rate-increase sentiments. Most traders were expecting the Fed to hold
rates today, but the wording led traders to bet that the Fed could cut rates by
June. For the last few weeks, the yen has been a major focus for currency
traders, as the effects of the global selloff affect the carry trade.
Traders buy back the yen to cover positions on weakness, and borrow the yen to
buy assets when the market is safer. The international currency market has
favored currencies backed by inflationary, positive-growth economies, which
Europe has proven itself to be. The U.S. and Japan have both struggled to
make a case for their central banks to raise rates.

Crude oil rose about 0.7% to close near $60 a
barrel today, after the Energy Department announced that U.S. gasoline supplies
have fallen for the sixth straight week. Crude broke through crucial
support at 60 last Monday, and fell all of last week. Since then, though,
crude has inched back near the benchmark on supply and geopolitical concerns.
Natural gas futures rose nearly 4%, in a move attributed to higher crude prices.

Gold prices rose fractionally today, as crude
moved higher. Lately gold has been trading in line with the equities
markets; usually, gold trades inversely to the dollar and with oil. Oil
trading dominated today’s gold action, as traders started to look for safety in
the metals as the price of oil moved higher. Copper prices fell 0.5% on
rising global production and slowing demand in the U.S.

Grains moved higher across the board today.
Corn rose 1%, wheat moved higher about 0.9% and soybeans rose 0.3%.


Fed keeps
overnight rate at 5.25%, and eased off of its “tightening” phrasing.

John Lee

Associate Editor