Bonds Rise on Fed Wording

By John Lee

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%.

Economic News
Fed keeps overnight rate at 5.25%, and eased off of its "tightening" phrasing.