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(May 9, 1997) INTEREST RATES: The bond market met resistance at the 110-10 level Thursday. We have seen a 1/4-point rate hike built in.
The numbers tell us the trend is now sideways. The decline, which lasted several months, is now over. The close tonight was 110-07, 6.0 points off the recent highs of 116-16. The sell off has continued and a two-day move above 108-30 did cause a jump to 109- 24. The intermediate-term trend is now neutral. The economic numbers have been strong causing bond weakness. They have showed a bit of improvement. We see a long bond yield in the area of 6.9% at present. The Fed chairman's talks produced no cheer this month, Rubin has helped the dollar, but this has pushed down the bonds in a nice panic. Some locals have crashed and burned buying the dips before this and paid the price with large losses. The Osprey Intermediate-Term Model is slightly positive here since 108-30 was overcome on a two-day close basis. Most fundamentals point to higher bonds due to a weak economy and Fed inaction. The long trend shifts to side as May comes with non-farm payroll/unemployment data. This interest rate sell off has been a real winner over the last three months. The Eurodollars are now in a side trend with a close of 94.07 in June Eurodollars. A close below 94.07 did turn the short-term negative and give a sell signal for the June Eurodollars. The market remains higher this week as well. This is turning into a choppy month as the ranges become contracted in April 1997. The players have been rewarded if they were short in the recent drop up of 3.8 points. We got our short covering rally to 110-10 this week. This just fell short of 110-16. That failure there tells us that the bond bulls have more left. The trend is now unclear and not down. The press tells us that the Fed continues to favor tightening to keep this posture on place. The dollar is giving up a little against the DM, JY, SF, FF, and IL. This is no accident as a stronger dollar attracts higher yields in fixed income. The yield curve is interesting and some have benefitted by the move up in long-term versus short-term rates. The Municipal bonds are keeping ahead of Treasuries. We look for more volatility on the downside with short-covering rallies till June 30. Look for some long-term cycles to bottom then and the seasonal to bottom out. The price ranges expected are 110-28 high and 104-16 low. Have a good trading week.
June Treasury Bonds--Position: Close 110-07 +18. June Eurodollars--Position: Close 94.05 <196>2.
David E. Triester
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