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THE REAPER
P.O. Box 84901, Phoenix, Arizona
(September 25, 1997) FINANCIAL INSTRUMENTS: INTEREST RATES–December T-bonds have stalled amid extremely overbought conditions at 116-117 resistance. Ditto December T-notes at 111. Both T-bonds and T-notes are extremely overbought on the stochastic indicator. December T-bond support stands at 112-00, December T-notes at 108. Caution is advised in bonds. Price action suggests at best a trading range near term. T-bonds and T-notes have moved higher with soaring utility prices. T-bonds and T-notes have also been strengthened by news that ace investor Warren Buffett has been buying zero coupon U.S. Treasury bonds in a big way. It will be very difficult for T- bonds and T-notes to rally (U.S. interests to fall) with the U.S. Dollar under selling pressure. (A 1% drop in the long-term bond yield alters the stock market's fair value by 18%, and thus is bullish for stocks.)
RECOMMENDATION–Investors may lightly buy put options in December or March T-bonds. High-risk futures investors may lightly sell March T-bonds short with 117-00 close only protective stops. As discussed in the long-term investor's portfolio hold the Benham European Government Bond fund which is appreciating with the European currencies. Consider taking partial profits on the Benham Target Maturities Trust: 2005. Sell this trust if December T-bonds close below 112-00.
R. E. McMaster, Jr.
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