wmeubank@ocp.kcmo.com
AIC INVESTMENT ADVISORS, INC.
440 South Street, Pittsfield, Massachusetts
(December 1, 1997) FINANCIAL INSTRUMENTS: INTEREST RATES–The two major factors influencing interest rates during November centered on developments in Asian markets and their impact on U.S. financial markets. The growing confusion and collapse in foreign markets convinced the Federal Reserve that the best monetary policy to pursue would be to leave interest rates unchanged in the U.S. and talk up international stability via cash and guarantees and injections from the International Monetary Fund (IMF). On the positive side for U.S. Treasury holders, the uncertainty caused a flight to quality and U.S. Treasury issues benefited (prices rose and yields dropped) as foreign and domestic investors, looked for a safe haven and Treasury issues were the choice.
Reflecting this action, the U.S. Treasury yield curve flattened during the past four weeks. Yields within the 3-month to 2-year range were reasonably stable, albeit the 3 -month bill yield rose 10 basis points from a month earlier. From the 2-year to 30-year range, yields decreased significantly from a month earlier with the 2-year issue yielding nearly 7 basis points less, and the 30-year issue decreasing approximately 25 basis points in yield to 6.07% at this writing.
The table below shows selected yields for various fixed-income issues and indices for the indicated dates as well as the change in basis points from approximately one month earlier.
Change In Basis Issues 10/28/97 11/21/97 Points U.S. Treasury Bills (91 day) 5.24% 5.24% 0 Corporate bonds (1-10 yr index) 6.26 6.24 —02 Dow Jones bonds-10 utilities 7.05 6.94 —11 U.S. Treasury Notes (5 year) 5.90 5.77 —13 U.S. Treasury Bonds (20 year) 6.34 6.12 —22
As we have reiterated in the past several Investment Bulletins, interest rates should continue to reflect a downward bias in the months to come as monetary authorities the world over fight deflation. The 2- to 5-year maturity range remains the most attractive alternative at this time.
Richard F. Maloney
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