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THE REAPER
P.O. Box 84901, Phoenix, Arizona
(August 14, 1997) FINANCIAL INSTRUMENTS: INTEREST RATES–The market was shocked by the decline in September T-bonds from 117 to 112 in just six trading days. The retest of 114 resistance will be critical. Bonds, like stocks and precious metals are clustering for a turning point around Labor Day. Obviously, an increase in inflation will be bearish for the bonds. The put/call ratio on Treasury bond options reached bearish levels which helped accelerate the sell-off in bonds. With the U.S. Treasury only going to raise $40 billion in new cash this year, the 5-point drop in T-bonds is ominous. Thus, these next three months could be critical for the T-bond market. The junk bond issues in the first half of 1997 were a huge $46 billion. The real danger is if foreign investors lighten up on their long positions in U.S. dollars (T-bonds)–it will hurt the bond market, drive U.S. interest rates higher, dump the U.S. stock market and the U.S. Dollar. There are concerns about new debt offerings, a glut of new corporate debt, and a burst of economic activity firming interest rates, weakening bonds. The 30-year T- bond is yielding about 6.6%. It will be important to note if the $4 billion that funneled into bond funds in July is matched in August and September. The trading public is too bullish on T-bonds, but U.S. unemployment hit a 24-year low. U.S. inflation a 31-year low, the U.S. budget deficit as a percentage of GDP, a 24-year low–all supportive of bonds, as are S&P corporate earnings per share rising at a record pace and record foreign direct investment.
RECOMMENDATION–Futures investors may light buy December T-bonds on breaks below 113 with 111-19 open protective stops. If this protective open stop is hit, reverse and sell short with 113-09 open protective stops.
R.E. McMaster, Jr.
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