Bonds Rise and the Fed Holds News

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 December.

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%.

John Lee
Associate Editor
johnl@tradingmarkets.com