Bonds Sink, Fed Holds Rate

U.S. 10-year Treasury bond prices fell today, after the Fed held the key overnight bank interest rate at 5.25%, and said that inflation remained the major concern for the U.S. central bank. Bonds fell on the news; with the Fed remaining concerned about inflation, it is not probable that the Fed will cut rates any time this year to deal with slowing growth. Interest rate futures show about a 15% chance of rate cut by December.

The yen fell off of 2-week highs over the dollar, and also dropped against the euro today, on a general resumption of the carry trade. Traders commonly borrow the yen at a cheap rate, and then use the borrowed currency to buy into more profitable assets, creating the so-called carry trade. The yen has been trading at or near all-time lows against the euro lately, and this recent yen surge was the result of traders paring back risky bets with the borrowed yen. After rallying for 2 straight days, the yen is now resuming its general trend. The dollar was flat against the euro. The dollar fell against the Canadian doll after some mixed reports out of the U.S.

Crude oil futures rose about 1.3% today, as U.S. refinery demand jumps with more refineries back in action after the spring lull. Because summer is typically a period of high energy demand, refineries are shut down during the spring for cleaning and repairs. With refinery capacity on the rise, there is more crude needed to keep the refineries working at full tilt. Natural gas fell fractionally today on a larger-than-expected inventory report.

Gold futures gained nearly 1% today, as rising oil prices fueled demand for a safe-haven. Gold usually moves inversely to the dollar and with oil; lately gold has also been moving lower on rising interest rates. Copper futures gained over 2% on more South American strike worries.

Grains traded mixed today. Soybeans gained 0.8%, wheat rose 0.2% and corn fell 1.5%.

John Lee
Associate Editor
johnl@tradingmarkets.com

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