THE REAPER

P.O. Box 84901, Phoenix, Arizona

(November 25, 1997) FINANCIAL INSTRUMENTS: INTEREST RATES–T-bonds are facing resistance at the key 6% yield level. A breakout below this level could lead to a quick rally by December T-bonds to 120, possibly even 123, and maybe a spike higher. Ninety-seven percent of investors were bullish in U.S. T-bonds as of November 20. That's excessive. December T-notes topped October 28; December Muni bonds topped October 3. Our financial turning point in early December will be important to monitor with this excessive technical and psychological exuberance and bearish divergence. T-bonds have primarily benefited in a “flight to quality” from safety-oriented U.S. buyers who are bailing out of stocks, and to a lesser extent, foreign investors fleeing their currencies in order to hold U.S. Dollars. Additionally, the emerging junk and corporate bond markets have tumbled, leading to investors transferring funds into T-bonds. The question remains, who is going to buy U.S. T-bonds below 6%? Also, what happens when foreign central banks sell U.S. Treasuries to raise liquidity or to defend their currencies? When the U.S. Dollar weakens, it will further pressure the T-bond market and lead to liquidation of U.S. T-bonds, particularly by foreign investors. On the positive side of the scale, with regard to foreign investing in U.S. T-bonds, this next year when the Japanese deregulate, bond money should flow out of the yen into U.S. T-bonds. Technically, the trend in U.S. T-bonds is up, with extreme overbought technical and psychological conditions existing with the rally into resistance, approaching the 120 level. Effectively, T-bonds have struggled to move higher since October 28. Utilities have continued to do much better. But as long as the U.S. runs a huge trade deficit with the rest of the world, the rest of the world will buy U.S. T-bonds. Refinancing of Municipal bonds and mortgage debt has positively impacted U.S. Treasury debt, too. But then there is the question of the Brady Bonds in South America, in Brazil particularly. The Brady Bonds, of course, are what bailed out Mexico. The Benham International Bond Fund remains a way to play the appreciation in European bond prices. Other currencies to consider include Irish government gilt bonds of one-year maturity (Irish) 9.75%, 6/1/98; German treasuries 6.375%, maturity 12/98; Australian government notes (QTC) 8%, 7/14/99; British Pound notes 7%, maturing 3/98. If the Japanese Yen becomes too undervalued, Japanese bonds could be a buy. Risk is certainly high, however, if the yen collapses. Seven-to-ten year New Zealand bonds may do well longer term.

RECOMMENDATION–Investors who lightly purchased put options in March T-bonds on scale-up strength–hold. Hold Benham International Bond Fund positions and Benham Target Maturities Trust: 2005. Futures investors profitably long December T-bonds use 117-23 open protective stops. Consider some of the international bonds discussed.

R.E. McMaster, Jr.

Consensus National Futures and Financial On Line Index

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