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Treasury Bonds Surge as Bernanke Says Rates Will Remain Low

James Hyerczyk from ForexHound.com at 11/16/09


Federal Reserve Chairman Bernanke said late this morning that the Fed is likely to keep interest rates exceptionally low for “an extended period.” These three words helped December Treasury Bonds surge to the upside. Early support and upward movement was triggered by a revision in U.S. retail sales in September.

Bernanke also commented on the Dollar which came as a surprise since the Dollar is the concern of the Treasury. He expressed some concerns that a lower Dollar may attempt to derail the Fed from its mandate to provide stable employment and price stability.

Kansas City Fed President Thomas Hoenig also helped the Treasury markets by stating that the U.S. economy still faced “significant weaknesses.” This was another sign that U.S. rates will remain significantly lower.

U.S. equity markets are rallying this morning and trading near their highs at the mid-session. The weaker Dollar is once again fueling demand for higher yielding assets. News that the Fed is likely to keep liquidity in the market and interest rates low for some time is adding to the sharp rise.

The U.S. Dollar continues to feel downside pressure from APEC comments at the mid-session. Earlier the group of Asian-Pacific nations pledged to maintain stimulus until there’s signs of “durable growth”. This served as a sign that liquidity in the global markets will continue until strong economic trends can develop. Excess liquidity reduces the Dollar’s allure as a safe haven currency and increased demand for higher yielding assets.

APEC leaders also challenged President Obama who is facing a credibility crisis. APEC wants to know if he is committed to free trade since recent actions by the U.S. regarding Chinese imports seemed to be indicating otherwise. The APEC nations also endorsed China’s stance in fighting protectionism and declined to back U.S. calls for a stronger Yuan. Some analysts are calling this trip a failure for Obama. Others are saying it is bad timing for the U.S. to go after China’s economic policies at this time.

December Gold posted a new all-time high this morning. The weaker Dollar seems to be the driving force behind today’s gains. Analysts are starting to believe that this market is forming a “bubble”. At some point inflation is going to have to show up or this market could come crashing down.

Stronger equity markets and a weaker Dollar are contributing to the rise in December Crude Oil. Speculators supported this market on the dip. So far there is no change in the supply and demand fundamentals to back today’s rally. A Fed official’s comment that the economy was still facing “significant weaknesses” should have been bearish news. There is still a divergence between oil and the Euro which could be a clue that this market will be headed lower if the Dollar strengthens just a little.

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