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THE REAPER
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(March 20, 2002) FINANCIAL INSTRUMENTS: INTEREST RATES--Long-term, U.S. interest rates have bottomed. (The big picture here is that bond prices had risen, longterm interest rates had fallen, for two decades. That's a bit much.) There is an irony here that the U.S. has the lowest real interest rates in 40 years for banks, and yet the U.S. Dollar may be 20%-25% overvalued. And by contrast, business is faced with average real interest rates of approximately 10.5%. That shows the difference in risk between the public and the private sectors. The Fed Funds rate is 1.75%. Ten-year T-note yield--5.41%. This interest rate spread is helping the banks. The banks can borrow money at less than 2% and buy T-bonds/T-notes that are paying 5%. This "carry trade" bales out the banks, and reliquifies them at U.S. taxpayer expense. The discount rate is the lowest it has been in 40 years and yet businesses can not get a loan. Who says the Federal Reserve is not a private corporation that works for the big banks! Predictably, investors once again bought bonds at the wrong time, in January, when $11 billion net flowed into bond mutual funds. Bonds topped in January and February, at the time of this fourth greatest inflow into bond mutual funds on record. It will take weak close by June T-bonds below 97-00 to accelerate the downtrend. Resistance comes in at 100-101.

RECOMMENDATION--Futures investors who have profitably purchased put options in June T-bonds on scale-up strength hold, but take partial profits. Futures investors profitably short June T-bonds on scale-up strength use 102-05 and 99-17 open protective stops. Partial profits taken when downside target of 98-00 hit.

R.E. McMaster, Jr.
www.TheReaper.com

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