Money and Metals

Dow Jones Newswires reports on precious metals. "Fund and chart-based selling sent gold and silver futures sharply lower Thursday, with weakness triggered in large part by a stronger U.S. dollar and the highest U.S. Treasury yields in 11 months, analysts said. August gold fell $9.40 to $665.20 an ounce on the Comex division of the New
York Mercantile Exchange. Comex July silver fell 23.7 cents to $13.48."

"Gold started softer in response to a stronger dollar and recovered as crude oil moved higher by more than $1 a barrel. But as the euro extended its losses late in the session, the precious metals did likewise, with the move accelerating when technical selling was triggered, a trader reported."

"The euro fell as far as $1.3422 from $1.3504 late Wednesday. 'We hit some stops,' said the trader. 'The euro is back down again and that seems to be the whole story.'"

"'A lot of it has to do with people just wanting out, because the higher market in Treasury yields is just frightening everyone,' said George Gero, vice president with RBC Capital Markets Global Futures. 'They are concerned that higher rates are going to make it much more expensive to hold the metal.'"

"The 10-year Treasury yield climbed as high as 5.11%, a level last reached in July 2006. Currency analysts linked this to the dollar's gains."

"With interest rates seemingly heading higher in many parts of the world, some
participants are exiting so-called yen carry trades, Gero said. 'There are quite a few funds selling,' Gero said."

"This is occurring against a backdrop in which traders are mindful of some central bank selling in recent months, particularly from the Bank of Spain, he added."

"Meanwhile, July platinum fell $4.60 to $1,295.50 an ounce after initially spiking higher to $1,320, its strongest level since May 22. 'Volume dries up there and it turns around on a dime,' said one trader. 'It got pushed above $1,300, but didn't have enough juice to stay above. As soon as the buying stopped, there was a $20 downtick.'"

"Another trader commented that fund buying initially propelled the metal higher, with buy stops hit. Then funds were sellers as platinum backed off, he said. 'It was a big-time speculative whipsaw,' he continued. 'They triggered some stops on the way up, then everybody just bailed.'"

"September palladium finished softer by $2.45 to $372.45, but was more subdued, with an open-outcry range of just $1.25."

From Reuters. "Bond investors' growing concern about global growth and inflation has battered long-dated U.S. Treasury prices and sent their yields higher than shorter maturities, triggering fresh market bets on the spread between the two."

"The rapid flip-flop this week from a so-called inverted yield curve, where 2-year note yields traded above benchmark 10-year Treasury note yields, stunned investors, as the yields on longer maturies rose above yields on short maturities by the most in a year."

"The spread between 2-year and 10-year notes widened on Thursday to 9 basis points, with the 10-year note yield at 5.12 percent, above the 2-year note's 5.03 percent, and the gap could widen further to around 20 basis points in the near term, analysts said."

"'The reasons for the trade include the notion that U.S. and global inflation are rising and that the Fed will lag other central banks (in raising U.S. interest rates) due to ongoing concerns about the housing sector correction,' Marta said."

"The increasing likelihood of more interest rate rises overseas, after the ECB raised rates on Wednesday and the New Zealand central bank surprised with a rise earlier on Thursday, is a main catalyst for the selloff in global sovereign debt that impacted U.S. Treasury prices."

"The speed and timing of the Treasury market's moves 'has taken people by surprise because it seems to be the data abroad that is driving it,' said Matthew Moore, economic strategist with Banc of America Securities in New York."

"By year end, the gap of 10-year Treasury yields over 2-year yields could steepen to between 20 and 25 basis points, Moore predicted."

"Just a month ago, the prevailing market view was that by the end of 2007, the Federal Reserve would start cutting interest rates, which tends to pull short-maturity yields lower. But a resurgence of global inflation worries has effectively extinguished investors' expectations for a Fed rate cut, and the Fed is now expected to hold interest rates steady through the end of this year."

"'What is interesting is that this is a steepening sell off,' said Josh Stiles, bond strategist with IDEAglobal in New York. 'There is a growing concern about global demand and a more lasting global pick up in price pressures under way on a multi-year basis,' he said."

"Stiles expects the benchmark 10-year Treasury yield may have to rise to 5.25 or 5.30 percent before the market sell off abates."

"However, this week's Treasury market sell-off, also driven by mortgage-related selling of U.S. government bonds and a rapid reversal of market positioning, may soon abate and perhaps partly reverse, some argue. 'You have to bear in mind that there is an irrationality going on in markets,' said David Ader, head of government bond strategy with RBS Greenwich Capital. 'This is a panic regurgitation of paper,' Ader said."

"However, he thinks the shift toward steepening of the yield curve could be sustained for a while. Ader expects the curve could steepen to between 17 and 21 basis points near term, levels it last reached in April of 2006."