U.S. Bonds and Yen Ease Back

By John Lee

U.S. 10-year Treasury bonds fell for the first time in 3 days today, after traders loosened up on subprime mortgage worries. The subprime mortgage sector has been in major trouble lately, as two big-name lenders recently announced they are unable to pay their creditors. Investors feel that this weakness could be a sign of more trouble to come for the U.S. economy, which was plagued by slow growth and a housing market slide during the second half of 2006. The housing market remains a key focus for bond traders, and should remain so into the short-term future. Bonds usually rise on economic weakness and fall on strength, so today's move could be seen as a rest after a sharp move higher on sentiments of overall economic weakness.

The yen fell back against the euro and the dollar today, as investors reloaded carry trades on overall positive market sentiments. The yen rallied during both of the recent equity selloffs, as traders bought back the yen and exited more profitable asset trades. The international currency market has favored currencies backed by inflationary, positive-growth economies, which puts Europe in the most favorable light. The U.S. has no real chance of raising rates soon, and Japan's prospects are still up in the air. Watch for key economic reports from both countries for a hint of strength or weakness.

Crude oil rose just under 0.5% today, after the Energy Department reported an unexpected decline in U.S. refinery output last week. Oil had fallen for 3 straight days on high supplies, and signs that OPEC does not plan to cut international output any further. Crude oil fell more than 30% from July record highs before bouncing back on falling supplies and winter's arrival. For the last few weeks, crude has been trading in a tight range around 60, which has served as a key level of support and resistance for traders. After plunging through support on Friday, crude finally managed an anemic bounce today. Natural gas rose 2.7% as investors bought ahead of a perceived increase in energy use this summer.

Gold prices fell over 1%, as investors continue to sell the metal in-line with the market. Traders have been liquidating all asset classes to raise cash for protection over the past weeks, as major weakness shows itself in the equities market. Gold usually moves inversely to the dollar and with oil prices, but lately, gold has been trading in sync with the equities markets, and could be seen as a general proxy for market health. Copper prices were up by nearly 1%.

Grain prices fell across the board today. Wheat fell 0.75%, corn dropped around 0.5% and soybeans fell around 0.3%.

Economic News
U.S. import prices rose less than forecast last month.