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Pastimes : The Naked Truth - Big Kahuna a Myth
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To: Amelia Carhartt who wrote (54114)7/31/1999 3:40:00 PM
From: pater tenebrarum  Read Replies (1) of 86076
 
Bonds may well become attractive again at some point.there is an interesting theory by Jim Bianco, who argues that bonds have fallen prey to the strength of the stock market.He basically says that the wealth effect has become such a dominant force in the economy, that the bond market reflects now the fact that the economy will stay hot as long as stocks remain high or go even higher. many say that expectations regarding the Fed's likely bias are the driving force in the bond market. however, the Fed is usually a follower rather than a leader and from a purely supply/demand perspective it is the strong demand for credit that chiefly drives rates up, while at the same time growth in money supply has become erratic over the last few months. in addition to this credit demand that's driven by the wealth effect, the supply/demand equation for the bonds themselves is also deteriorating. on the supply side corporations are in a rush to issue a ton of paper in order to capture rates before they go higher and also due to a perceived Y2K liquidity crunch, while demand for dollar denominated paper on the part of foreign investors is drying up as long as the dollar looks weak. i tend to agree with Bianco that probably only a perceptible decline in stock prices can currently revive bonds. a bounce in the dollar or friendlier inflation data may also give bonds a little boost, but both seem unlikely to be forthcoming soon.
it will be interesting to see at what point rates are high enough to lure genuine buying back into the market.

regards,

hb
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