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THE HIGHTOWER REPORT
141 W. Jackson Blvd., Ste. 1520A, Chicago, Illinois
(October 15, 1997) FINANCIAL INSTRUMENTS: THE OUTLOOK FOR BONDS–While the bond market might suffer an initial selling bout with renewed rate hike fever, the U.S. financial markets remain at an advantage in the world market. The distinct lack of competitive investments to U.S. Treasuries is underpinned by an economy strong enough to withstand higher interest rates. In the current world market an economy capable of hiking rates without causing a recession is rare. In fact many Japanese pensioners are desperately in need of any incremental increase in yield as Japanese interest rates by most measures are the lowest of anytime in the history of the world! While there are short-term concerns about the pace of the U.S. economy and signs of higher interest rates foreign investors are forced to hold and maybe even add Treasuries. Sudden setbacks in the mark and yen after two months of upside action highlights the shift in sentiment back in favor of U.S. investments. Furthermore, despite some complaints against the U.S. Federal Reserve Chairman dialogue the fact is that the Fed is being diligent toward inflation and could once again extend the favorable conditions beyond current expectations. Forecasts last week that business activity in the U.S. is expected to slow into the year-ending holiday period also give the bonds some support on breaks. We would think bonds could be sloppy to down all the way into early November as expectations of a rate hike weigh on prices. However, prices below 114.20 basis the December bond represent an attractive value given current conditions. In fact a sell the rumor buy the fact condition probably exists into the next FOMC meeting in November. Looking at 10 year seasonals in the March bonds one finds that bonds normally top in mid- to late September and make the biggest swing of the year lower through the first week of November. Traders should be selling puts in bonds or buying futures on any two- or three-day correction looking for a return to the 116.30 level basis December bonds.
SUGGESTED TRADING STRATEGIES–1) Buy December bonds at 114.25 with an objective of 116.10. Risk the trade to a close below 114.01. 2) Sell November bond 114 puts for 34 ticks on a break with an objective of 0 and a risk of 47 on the option.
For daily market updates of the Hightower Report of Comprehensive Commodity Research, call 900-225-2200, extension 2 for Financial Market Forecast.
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