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THE REAPER
P. O. Box 84901, Phoenix, Arizona
(October 9, 1997) FINANCIAL INSTRUMENTS: INTEREST RATES–Interest-rate sensitive stocks have been doing well, which speaks to the (overdone?) expectation for lower long- term use interest rates. However, when the T-bond futures sell off, so do these interest-rate sensitive stocks. The fact the U.S. Dollar is not appreciating means that the inflation outlook will worsen. This is confirmed by higher key commodity prices. This is negative for the interest rate futures because a weaker dollar suggests higher inflation and thus higher interest rates, as do higher commodity prices. Tight labor markets and rising wage costs are inflationary, too, and are pressuring the bond markets, as is the money supply growth rate of 8%. Has optimism gone to an extreme in the interest rate futures and bond markets generally? There is significant resistance now in December T-bond futures at 118-00, and, of course, 120-00 through 122-00. Key December T-bonds support is 112-00. Key December T-bond support is 108-00. Thirty-year T- bonds are likely to hold the 6% level. A growing market for asset bonds is more risky because of increasing home equity loans. There are approximately $120 billion of such bonds. The ratio of the six- month T-bill rate to the yield on the S&P 500 is 3.2/1, the widest is at least 20 years.
RECOMMENDATION–Investors who lightly purchased put options in December or March T-bonds on scale-up strength–hold. Hold Benham European Government Bond Fund and Benham Target Maturities Trust: 2005. Take only partial profits.
R.E. McMaster, Jr.
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