Market Analysis

Bonds began weakening yesterday afternoon and are down further this morning as a result of weaker than expected demand for the Treasury Dept's 30 yr bond auction yesterday and comments by Fed Chairman Bernanke that the bank will tighten monetary policy (raise rates) once the economy improves.  The bid/cover ratio for the $12 billion auction was 2.37 (28.4 billion in total bids) the yield demanded by investors was above 4% (the 30 yr bond had been trading at below 4% prior to the auction).  The 30 year yield this morning is at 4.13% and the 10 year yield is at 3.32%.

In economic news, the US Trade Deficit declined, after increasing for four straight months, due to continued weak consumer demand for imports in the US and the weak dollar which makes exports more expensive.  Foreign governments in Asia and Europe are intervening in the currency markets to prop up the dollar by buying US dollars.  The dollar is up in currency markets today, which makes US Treasury notes slightly more expensive to foreign buyers, who in turn are requiring slightly higher yields this morning to compensate, particularly against the backdrop of fears that bonds maybe overpriced right now (yields too low).  Over the long term, however, a strong dollar is considered good for interest rates because foreign investors who hold US Treasuries do not want them to depreciate against their own currency.  Another short term side effect of the weak dollar has been that the US stock market has been a bargain for foreign investors who are essentially receiving a discount simply because of the currency differences.