Bonds Slip on Market Rally, Rate Cut Expectations

U.S. 10-year Treasury bonds fell off 5-month highs today, as stocks extended a rally that started on Friday, and investors felt more confident about the coming months for the U.S. economy. Bonds have been rising since the beginning of June, when the first signs of problems began to emerge from the subprime sector. As the conditions worsened, and stocks plummeted, bonds shot up to 5-month highs on worries that the credit crunch would severely effect the entire U.S. economy. With stocks managing a strong rebound, and traders looking for a rate cut in September, bonds took a breather from rallying today.

The dollar rose slightly against the euro and the yen today, despite early yen strength across the board. The yen started the week strong, but quickly fell off as U.S. equity markets staged a mini-rally, and traders resumed the carry trade. The yen made gains early this morning versus the euro, but was flat to lower by the close. Lately, the yen has been trading inversely with global equity markets, on the carry trade dynamic. In general, global equity markets have had a large hand in directing currency movements over the past few weeks. The dollar was flat down the Canadian dollar and up on the British pound.

Crude oil futures rose about 1%, as traders speculated that tomorrow's Energy Department report will show a drop in energy supplies. Crude has been on the rise after falling more than 10% since early August; crude has now gained more than half of those losses back. Natural gas futures rose over 4% today, on speculation of higher prices to come later in the year.

Gold futures rose over 1% today, on speculation that rising U.S. equities will boost demand for gold as a safety. Gold plummeted during the recent selloff, as traders bet that a weakening market overall would negatively effect gold demand. Copper futures fell about 1.5%.

Grains were up across the board. Soybeans rose about 3%, and corn gained 4%.

Stocks rose on Tuesday, after the August ISM Manufacturing survey declined, increasing traders expectations of a possible rate cut by the Federal Reserve. Click here to read the rest of today's Stock Market Recap.

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