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Pastimes : Let's Talk About Our Feelings!!!

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To: nihil who wrote (69675)	1/2/2000 4:11:00 PM
From: pezz	Read Replies (2) of 108807

Clearly if Michael believes what he posted and makes money in the markets then sadly it is a random walk after all..... But I would beg to differ [ with your excellent post ]on one point though .If I may be so bold. <<The monetary authorities can do damned near anything they wish with short term rates, but they can do virtually nothing with bond interest rates. >> When the fed moves short term rates the bond market follows in lock step except when 1.It has long been expected [the raise]and a relief rally ensues.Vice versa 2. It is less [or more ]than expected. ie. a 1/4 raise in place of an anticipated 1/2 point or vice versa 3. The market is convinced [for whatever reason ]that this is the last in a series of hikes or declines. In these instances the market forces have moved the long bond prior to the fed's moves but in the direction that the fed moved thus the fed has moved these rates just by the mere threat of action! 4. On rare occasion the long bond may move opposite the fed for short periods if it is perceived that the fed's action is temporary or the markets are over sold,over bought or unusual economic conditions are moving the markets producing an inverted yield curve. Trust me this is a short term phenomena and will not persist in the face of continuing pressure from the fed. Perceived inflation [or lack of] is not the only reason for movement in long bond yield. Short term rates can act as competition for money vis-a-vis the long end. That long rates tend to be higher than short rates is a premium that must be paid by the borrower because of the risk of loss of capitol on a 30 year loan. If short rates rise this premium is reduced if long rates don't follow suit...Ask your self this. If the fed announced tomorrow that they expected to raise short term rates two or three times in the coming year and you knew this today would you go long or short on the 30 year notes? When Allen Greenspan speaks the long bond listens.....Yes the Fed can indeed control long term rates ...Directly ,no..... but control them none the less.

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