Bonds Bounce from Extended Lows

U.S. 10-year Treasury bonds staged a bounce, after falling dramatically over the past two days on widespread sentiment that the Fed will not cut rates any time during this year. Investors speculated that the bounce today was merely a correction, after weeks of steadily falling bond prices. Bonds began to drop in May, on a string of turnaround economic reports and hawkish Fed comments. There is widespread consensus amongst traders that with U.S. growth rebounding and the economy picking up steam, the Fed will not be able to cut rates any time before Christmas.

The dollar moved to 5-year highs over the yen, but stalled against the euro today to close flat. Traders attributed yen weakness to the resumption of the carry trade, which has become more profitable in the last few weeks on rising global interest rates. As interest rates around the globe keep going higher, Japan's rate looks to stay the same, and traders are borrowing the yen and investing borrowed currencies into more profitable assets. The euro also bounced against the yen, which could also be attributed to a widespread resumption of the carry trade. The dollar was near flat against the Canadian, after giving up some gains from early in the day.

Oil rose 1.5% today, after the Energy Department released supply numbers that fell short of analyst expectations. Analysts were looking for a gain of 1.5 million gasoline barrels, while there were only 3,000 actually added. The missed numbers helped to stir up feelings that oil prices will move higher this summer, and that current reserve supplies will not be able to handle the spike in demand. Crude prices and demand usually rise in the summer. Natural gas futures fell 1% on expectations that tomorrow's inventory report will show a gain.

Gold futures were basically flat on the day. Gold has been falling as interest rates rise, as traders sell gold to enjoy the safety of high yields in U.S. bonds. Gold usually trades inversely to the dollar and with oil, but lately gold has been trading inversely to interest rate movements. Copper futures jumped 0.8% on strike worries in South America.

Grains were mixed, but mostly higher. Soybeans fell fractionally, but corn jumped nearly 3% and wheat rose over 4%.

John Lee
Associate Editor
johnl@tradingmarkets.com