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IRA EPSTEIN & COMPANY
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(October 28, 1997) FINANCIAL INSTRUMENTS: T-BONDS–What a difference a week makes.
If you remember last week we had very little economic news out and traders were focused on the upcoming third quarter employment cost index, due to be out today. Now with the Asian markets in a flurry, in particular the Hang Seng, Treasury bond futures reacted with a move up to the 118 area. The big question is where do we go from here?
While the market did see a general flight-to-quality, that flight seemed to end Tuesday morning when the stock market rebounded (from what I feel is somewhat of a false alarm). The U.S. economy is the best it has been in a long time. Inflation is low, employment is high, and currency prices are reasonable. Aside from perceived high P/E ratios on stock prices, this economy is going great.
The implications of the Asian stock market crisis are going to be hard to answer. Asia might have a harder time purchasing U.S. goods and U.S. companies in Asia will probably suffer a little with the currency devaluations and an economic slowdown. But the real test will be the upcoming months.
Beyond all the general theories and market analysis, I have a hard time believing that anyone really knows what is going to happen.
RECOMMENDATIONS–With that said, let's look at where the bond futures market stands today. The December bond future settled on Tuesday at 117 11/32. Volatility is running high in the December bond options market at about 13%. This is about two percentage points higher than when the stock market crisis began. So, assuming that this crisis is basically over it should be time to sell the December bond future. I would be a little hesitant to buy the options market because the volatility is so high. However I would consider selling options to receive premium.
Ole Rollag
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