A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
314-955-3050
(March 21, 2002) FINANCIAL INSTRUMENTS: Although the timing surrounding a reversal in Federal Reserve monetary policy is still unknown, we feel reasonably confident that sometime this year, the central bank will begin tightening policy. In general, we expect that somewhere between June and September the FOMC will begin tightening credit. As our currency story shows, fed funds are running below the core rate of inflation. The last time this occurred was in 1994.
Fed Funds Target And T-Note Yields
(Solid Line--Funds Target)
Chart courtesy of Haver Analytics.
In 1993, T-notes bottomed about three months before the FOMC began raising rates. Of course, the following year, 1994, was a rather bad year for longer-term debt. Since the current fed funds target is below the core rate of inflation, as it was in 1993, we suspect that the T-notes could be on the cusp of a significant bear market, which will accelerate once the tightening actually begins.
We are currently short June T-notes from 103-00, and would add on a rally to 104-16, and would also establish a position at 102-00 (sell stop), risking to 106-08 with an objective of 94-00. We expect it will take a year to reach this objective, and anticipate rolling the position over the next twelve months.
Bill O'Grady www.agedwards.com