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AIC INVESTMENT ADVISORS, INC.
400 South Street, Pittsfield, Massachusetts
(November 3, 1997) FINANCIAL INSTRUMENTS: INTEREST RATES–The uncertainty generated by equity markets brought significant buying into the market for U.S. Treasury issues during the latter days of October. Through October 24, interest rates across the yield curve had drifted about 6 to 10 basis points higher from the September 26 yields. In the following days, as equities dropped, the flight to quality issues began. Interest rates declined 9 basis points at the 5-year maturity; 15 basis points at the 10-year maturity; and 10 basis points at the 30-year maturity.
The meltdown in equity values around the globe will have a deflationary effect on economies and markets on a worldwide basis. Deflationary tendencies are beneficial to fixed income markets, normally resulting in higher prices for bonds and, consequently, lower yields for investors. With Asian nations under pressure to increase exports in order to pay down debt, (much of it denominated in foreign currencies including U.S. Dollars) Asian output is likely to increase and dollar prices in U.S. stores decrease. Unless labor costs begin to increase in a rather dramatic fashion, the Federal Reserve is not likely to tighten credit until the turmoil in the world's equity markets runs its course.
Change In Basis Issues 9/30/97 10/28/97 Points U.S. Treasury Bills (91 day) 5.10% 5.24% 14 Corporate Bonds (1-10 yr. Index 6.35 6.26 —9 Dow Jones Bonds–10 utilities 7.00 7.05 5 U.S. Treasury Notes (5 year) 5.99 5.90 —9 U.S. Treasury Bonds (20 year) 6.46 6.34 —12
At this writing, investors should continue to roll over issues and make commitments within the 2- to 5-year maturity range.
Richard F. Maloney
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