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Politics : Dutch Central Bank Sale Announcement Imminent? -- Ignore unavailable to you. Want to Upgrade?

To: sea_urchin who wrote (8042)	10/3/1999 4:49:00 PM
From: Crimson Ghost	Read Replies (2) \| Respond to of 81187

Rates headed Up Regardless of Fed: October 3, 1999 MARKET WATCH Even if Fed Is Idle, Rates Are on the Rise Related Articles The New York Times: Your Money Forum Join a Discussion on Investing By GRETCHEN MORGENSON EW YORK -- To the relief of many investors, members of the Federal Reserve Board have made clear that they will not be voting to raise interest rates at their meeting next Tuesday. So why are yields on U.S. Treasuries rising? The yield on the 30-year Treasury bond jumped to 6.13 percent on Friday, from 5.97 percent a week earlier. The obvious reason for the move was renewed inflation fears brought about by rising oil and gold prices. Adding to the anxiety was news on Friday that an index of prices paid by factories rose to its highest level in more than four years and that manufacturing grew faster in September than analysts had expected. But investors who remain certain that bond yields will retreat again should take note. A pattern of unrelenting selling sweeping through the Treasury market in recent weeks is not caused by bad economic news alone. Some of those doing the selling may be foreign investors who see the decline of the dollar hammering their returns. But Charles Peabody, bank analyst at Mitchell Securities in New York, says the bond market's behavior also reflects a broad unwinding of bets placed by investors who were later caught unware by recent interest-rate increases. Many of these positions are now going bad; as they are unwound, they push rates higher. First was the so-called yen carry trade, in which investors borrowed funds in Japan at microscopic interest rates and bought Treasuries with the proceeds. When the yen spiked up, profits turned to losses and the Treasuries had to be dumped. Last week's disastrous trade was a variation on this theme -- the gold carry trade -- in which investors bet that the price of gold will drop. They borrowed gold from a bank, sold the gold and bought Treasuries, making perhaps 4 percent on the difference between what they paid to borrow the gold and what they earned on the securities. With gold prices running up this week, those trades had to be unwound. The gold carry trade is nowhere near as big as outright bets made on rates, known as interest-rate swaps, in which one investor agrees with another to exchange a fixed rate for a floating rate. Interest-rate swaps account for more than 80 percent of derivatives held at American banks. In the second quarter, the notional value of interest-rate related derivatives at domestic banks stood at $25.7 trillion, up 28 percent from the corresponding period in 1998. As rates climb higher, these holdings become worrisome. At the same time, Peabody believes that we are starting to see the ill effects of rising rates on the nation's financial institutions. "Because of the positive reinforcement of declining rates over the last two decades," he said, "most financial players have increasingly used that trend as a way of boosting their profits." Now, the reverse is happening. In recent weeks, three small banks -- Keystone Financial Inc., the Regions Financial Corp. and Flagstar Bancorp -- have warned of earnings shortfalls owing to higher rates. Will rates rise further? "Any time you get a trend reversal in the discount rate, that trend remains in force on average for 14 months," Peabody said. "August represents the first month of a trend reversal." Home \| Site Index \| Site Search \| Forums \| Archives \| Marketplace Quick News \| Page One Plus \| International \| National/N.Y. \| Business \| Technology \| Science \| Sports \| Weather \| Editorial \| Op-Ed \| Arts \| Automobiles \| Books \| Diversions \| Job Market \| Real Estate \| Travel Help/Feedback \| Classifieds \| Services \| New York Today Copyright 1999 The New York Times Company Advertisement