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Strategies & Market Trends : Systems, Strategies and Resources for Trading Futures
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To: Brian Hornby who wrote (8054)11/8/1998 12:25:00 PM
From: GROUND ZERO™  Read Replies (1) of 44573
 
Brian,

You may be right, but I would be very cautious about presuming a rally in bonds if Greenspan lowers rates. He would lower near term rates, not long term rates.

A lowering of near term rates may actually cause the bonds to drop even further and help to widen the yield curve which has been flat for some time now.

Here's why bonds can move lower with lowered near term rates:

Lower lending rates would be designed to fuel business and encourage borrowing and monetary expansion to avoid recessionary down turns in the business cycle. If this expansion gets out of hand, we would have inflationary pressures added to the business cycle. These inflationary pressures, or fear of such pressures, would have a bearish effect on long term rates.

I'm not suggesting this would happen, but just to point out to you that lowering rates is truly a double edged sword. Personally, I believe Greenspan would prefer to raise rates, he's very fearful of inflation.

Here's why Greenspan is fearful of inflation:

U.S. unemployment is at a 25-30 year low, factory output and capacity utilization is not at all recessionary. The only thing that is currently preventing the United States from experiencing any inflationary pressures is the global monetary instability and the accompanying severe business down turn overseas.

This global problem is keeping the U.S. economy cooled down to allow steady growth and without a recession. This is probably why the equity markets are so strong recently.

GZ
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