Interest rates are the driving force in the markets at this time. Yields are creeping up and once again traders are becoming a little nervous about the U.S. ability to pay off its debt obligations.

As interest rates rise, Treasury instruments are weakening. Since rates are expected to rise as long as the Treasury continues to supply the market with notes and bonds, financial futures should remain under pressure. Money that is leaving the falling Treasury markets is jumping into equities.

Although this may not be the best reason to buy stocks, investors almost have no choice but to reallocate their funds to the stock market. Equity indices should continue to rise this week and possibly post a new high for the year. So far the current leg up has been very steady, but the current chart formation suggests the possibility of a sharp spike to the upside.

There are some major investors out there who are not fully committed to the stock market rally. Some have been waiting for “the correction” to enter. Unfortunately with the end of the quarter coming very quickly, some of these investors are underperforming the market. This means they may begin to “chase” the market higher. Don’t be surprised to see a huge move to the upside in equities between now and the end of June if these major players decide that they are missing the move and begin to pay anything to get invested.

The fear of higher interest rates is hurting the Dollar. Traders are leaving the Dollar overnight as once again there is developing sentiment that the U.S. government is going to have a hard time financing its debt obligations. Investors believe that the central bank is going to be forced to keep printing money to keep up with the growing deficit.

Flooding the market with newly printed money is debasing the Dollar and making gold and other commodities more attractive. Despite a vote of confidence by Asian nations that they will continue to buy U.S. Treasuries, they are no doubt taking protection elsewhere against a decline in Dollar-denominated instruments. So while China and Japan may buy our Treasuries, they are also selling the Dollar and buying gold as a hedge.

There is talk this morning that some investors are selling Treasuries and buying IMF bonds. This could be devastating to the Treasury market if a large chunk of available investing capital starts to ignore the Treasury auctions of new supply to buy these IMF instruments.

Continue to watch the auctions the rest of the week to see if the bid remains strong and yields steady. If investment interest in the Treasury auction begins to decline then yields could spike up, further weakening the Dollar.

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