Wednesday, 11 July 2007

Treasuries gain even as BoC hikes interest rates

The turmoil in the US subprime market continues to impact financial markets. Bloomberg reports:

Treasuries advanced the most since February after Standard & Poor's said it may cut credit ratings on $12 billion of bonds backed by subprime mortgages, sending investors to the safety of U.S. government debt.

Credit-default swaps, contracts used to speculate on a company's ability to repay debt, rose to the highest premium in more than a year in the U.S. and Europe. Stocks dropped on concern the housing slump will hurt corporate earnings and slow economic growth.

The fall in Treasury yields yesterday may be temporary though. Central banks around the world are still raising interest rates, for example, in Canada.

The Bank of Canada raised its benchmark interest rate for the first time in more than a year and said a "modest" tightening may still be needed to slow inflation.

Policy makers pushed the target rate for overnight loans up by a quarter point to 4.5 percent, the highest in six years and 75 basis points less than the Federal Reserve's target. All but one economist in a Bloomberg News survey predicted the increase.

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