Bonds Spike on Subprime Worries

By John Lee

U.S. 10-year Treasury bonds spiked higher today, pushing towards recent highs on major subprime mortgage sector weakness. For the second day in a row, a subprime lender announced that it would be unable to pay off creditors as the risk of lending to people with bad credit continues to rise. The subprime sector has been experiencing major weakness in the last few weeks, and this has led many investors to feel that the housing sector could be on the verge of more difficulties. Weakness in the housing sector during the second half of 2006 led to high bond prices and general weakness in the U.S. economy. Bond prices usually rise on weakness and fall on strength, so investors are taking recent subprime weakness as a negative for the economy.

The yen rose against the dollar and the euro, as traders began to unwind yen carry trades, in a move that led to a spike in the yen just last week. With investors fearful of global economic weakness, traders bought back yen and exited more profitable asset trades. The yen has been under serious pressure in the last months, having reached record lows against the euro and yearly lows against the dollar before bouncing on a global selloff. The international currency market has favored currencies backed by inflationary, positive-growth economies, which Europe has proven itself to be. The U.S. will most likely hold during the March Fed meeting, while Japan's chances of a rate hike remain to be known.

Crude oil fell about 1.5% today, after officials for OPEC nations said that the international organization will most likely keep output levels the same during a meeting this week. Crude broke through crucial support at 60 yesterday, on similar OPEC concerns. Late last year, OPEC initiated a daily withholding of nearly 2 million barrels a crude, to stem falling prices. Crude fell over 30% from July record highs, before bouncing on winter's arrival. A relatively warm winter has also helped to keep crude prices low. Natural gas rose fractionally after falling for the last 4 trading sessions.

Gold futures fell fractionally, as traders exited all asset classes on perceived economic weakness from the subprime sector. Gold usually trades inversely to the dollar and with oil, but lately gold has moved mostly in-line with the equities market, selling off and bouncing back at the same time. Copper fell nearly 1% on perceived weakness in U.S. growth.

Grains fell across the board today. Soybeans fell over 1%, wheat dropped nearly 1% and corn fell about 0.6%.

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