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ANALYSTS: U.S. STOCK & BOND INVERSION A TEMPORARY PHASE
Futures World News - November 19, 1997 10:42
FINANCIAL STOCK CURRENCY ECONOMY V%FWN P%FWN
Chicago-Nov. 19-FWN--WHEN THE ONGOING CURRENCY CRISIS among Southeast Asian nations started to drag on their equity markets in October, it sent U.S. stock and bond markets heading sharply in their own directions.
Stocks hit a series of selloffs, culminating in the Oct. 27 drop of 554.26 points in the Dow Jones Industrial Average (DJIA), while Treasuries rallied.
As U.S. stocks remained volatile, with large daily swings on either side of the market, bonds remained volatile as well but swung in the opposite direction to stocks. A sharp rise or fall in stocks produced the exact opposite reaction in Treasuries.
"In the last month you didn't even need to watch the bonds, you could watch the stocks and you knew where bonds were going," said Astrid Adolphson, economist with MCM Moneywatch.
Analysts said stocks and bonds should be returning to their normal relationship within a week or so.
The reasons for the divergence between U.S. stocks and Treasuries came from fears of deflation and from a "flight to quality" into U.S. Treasuries, according to Marshall Front, managing director at Trees Front Associates Inc.
Since the late 1960s, he said analysts normally had their financial barometers tuned to watch for signs of inflation, and the potential for higher interest rates, which can drag on both stocks and bonds.
When overseas equities sold off sharply last month, this ignited fears of deflation as it could potentially put pressure on prices and corporate earnings, Front said. Deflation would typically bring a drop in interest rates which would benefit Treasuries.
"Over the past several years the principal fear in the investment community has been inflation," Front said. "In the 1930s and other periods where deflation is the concern bonds do well but the stock market doesn't do well."
Bonds also benefited from a "flight to quality" last month as investors in the United States and around the world looked for a financial lifeboat to weather out the economic storm, he said.
This trend reversed itself as equity markets started to calm.
End of Part 1
