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To: JavaGuy who wrote (27142)	2/2/2000 9:37:00 PM
From: Charles Tutt	Read Replies (2) \| Respond to of 64865

I'm no bond expert, but nobody has leaped to the fore to rescue me, so I'll try to field your questions as best I can. Let me preface this by saying that I've just imbibed the better part of a bottle of wine, so my coherence may be impaired. First, I don't think you can ever assume "everyone" is aligned (as in "everyone believes the Fed is not done raising rates"). I've never seen a situation where there wasn't somebody willing to take the other side of a trade at some price -- that's what makes a market. There is even a price at which I'll bet against what I believe (we're talking financial instruments, not philosophy, ethics or religion, here). So there WILL be buyers of LT bonds, even if they appear unattractive to you and me. I get the same result as you (within roundoff error) on the 30 year zeroes, so at least our calculators agree (I'm using an HP 41CV, FWIW). Clearly it would suck to be holding 30 year zeroes if the interest rate changed that much. Of course, treasuries are not zeroes unless they're stripped, and I think zeroes are the worst case mathematically. BTW, I've only ever held zeroes and strips in an IRA -- in a taxable account, I think you need to watch out for imputed interest, which can be devastating. In times of high/increasing inflation (e.g. the 80's), as I recall, money went to hard assets and collectibles. Certainly not cash. An interesting sideline to this is that lots of folks put off buying houses during that period of high interest rates, when it was in fact an EXCELLENT time to buy houses, IMHO. Housing prices plummeted as interest rates skyrocketed. You can generally renegotiate mortgage interest rates when they fall, but the selling price on a house is fixed at the time of the transaction. Many (all?) of these asset shifts tend to be self-correcting. As an asset class becomes popular it rises in valuation, making it less attractive. Higher interest rates (1) compete with stocks for new money, (2) make business financing via debt more expensive, cutting earnings, and (3) slow the economy at the margin, also cutting earnings. They thus deal a triple whammy on stock prices. That's why they get such focus. Actually, I think there's a fourth effect, but (like Fermat) I'll leave that one to the reader. Maybe what I was trying to remember was that (by decreasing coverage) they harm financial strength. I don't think you can say that an inverted yield curve necessarily suggests "belief that LT rates are headed lower." Au contraire. I think the natural direction of movement will be towards a normal (not inverted) yield curve. As I said earlier, that can resolve as either intermediate rates dropping or long rates rising. I certainly agree that the Fed's job is not to cool the market. But I think they're concerned that all the play money floating around isn't healthy for the underlying economy, which IS their job. I'll probably think differently in the morning. Please don't hold me to any of this. I'm what you could call "impaired." JMHO (maybe not even that, given my current state), and none of this is to be remotely considered as legal or investment advice.

To: JavaGuy who wrote (27142)	2/3/2000 6:02:00 AM
From: JDN	Read Replies (2) \| Respond to of 64865

Dear Java Guy: Dont feel bad for feeling CONFUSED. The best experts are confused cause THIS HAD NEVER HAPPENED BEFORE. Not speaking of the inverted yield but the fact that we have GALLOPING GROWTH and NO INFLATION. Has them DUMBFOUNDED. Now, I will cut to the quick and give you the answer. Interest rates are going DOWN!! They will not go up over the long term. WHY?, because the worlds LARGEST,SAFEST, BORROWER, isnt borrowing anymore!!!!! The USA is intent on exiting the 30yrs bond market all together and ULTIMATELY out of debt ENTIRELY if Clinton's latest plan is implemented--and I believe it will be cause NO REPUBLICAN can dispute paying off the debt and the AMERICAN public once it gets the SMELL of cheap home mortgages will INSIST. So, if you wish to hold long term safe paper you got to GRAB IT WHILE ITS AVAILABLE, HENCE the SCRAMBLE for this paper has driven down the rate and will continue to do so. Now, here is what I see happening. The Fed will continue to raise rates UNTIL a slowdown occurs. IF the slowdown appears abrubt <and I think it will cause in my opinion we HAVE NO INFLATION so any change down spells DEFLATION> THEN the FED will IMMEDIATELY begin to lower interest rates which will then bring the short term rate down and eliminate the ridiculous situation of ST exceeding LT rates. JDN