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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Chip McVickar who wrote (2037)	8/10/1999 9:52:00 PM
From: Henry Volquardsen	Read Replies (2) of 3536

Hi Chip, Well to start with the Oct 98 low yield was a panic low based on a lot of fear. Those rates were unsustainable. Once it became clear that the crisis was passed it was natural for long rates to bounce back up. My speculation that given no movement in short rates and all other things being equal the equilibrium long bond yield would be ±5.5%. From that point I believe two other factors have contributed to the continuing rise in yields. The first is the obvious, with the boost to the domestic economy provided by last year's cuts the economy has been quite strong. This has led to a lot of ongoing speculation that the Fed would need a series of rate hikes. This speculation has been pretty prevalent in the bond market long before CNBC et al started picking up on it. The second factor is, I believe, the competitive demand for funds. At first it was coming from the US equity markets. With equities showing 20% plus returns with diminished risk perceptions it was very hard for the bond market to hold on to funds. Coupled with a very large corporate debt calendar it was drawing money away from bonds. Recently there has been the addition of overseas 'demand'. With foreign markets stabilizing and in many cases rallying a lot of the money that came to US bonds for safe haven is returning to those markets. I've been looking for 6.50 bond yields unless we see a trigger to spark renewed safe haven demand. If the markets stay calm I would not be surprised to see at least two more Fed hikes and a 'ridiculous' 7%. hope this helps Henry

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