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To: Ahda who wrote (12559)	6/3/1998 2:36:00 PM
From: Giraffe	Respond to of 116815

(from the Financial Times) Bonds could be winners in the deflation scenario Leading bond markets have been strong since mid-May even though equities have moved falteringly. Perhaps the markets are finally taking the deflation scenario seriously. Or maybe we have been seeing the impact of Japanese flight capital; this latest bond market upturn has coincided with renewed yen weakness. There has been particular strength in UK gilts, the highest yielders in government bonds among the developed economies. The 10-year gilt yield had tumbled 30 basis points in just over two weeks before yesterday's setback, at one point almost closing the spread against the corresponding US Treasury bond. The spread against German bonds remains a substantial 90 basis points, but most of that gap reflects much higher income at the short end of the sterling yield curve rather than any great difference in long-term yield expectations. Gilts have benefited from fears of a supply crunch as it has become clear that the UK is heading towards a substantial budget surplus. The cautious forecasting of this by the Treasury is understandable: Gordon Brown, chancellor of the exchequer, will scarcely want to encourage the increasing calls for more spending on education and health. So should US Treasuries move above gilts to the top of the yield league table? This has already happened at the 30-year term. Far Eastern investors probably wish to diversify their risks, especially into euro securities, given their high exposure to dollar assets. The US government is also moving into budget surplus, but there is heavy private sector issuance of dollar bonds as the corporate sector leverages up. The biggest immediate obstacle, however, is the spectacular strength of the US economy, with first-quarter gross domestic product growth revised up last week to 4.8 per cent. The comfortable slowdown so regularly forecast by securities industry economists is just not happening (and the recent sharp acceleration of broad money growth has confirmed the durability of the trend). Imported deflation is clearly visible in the weakness of the producer price index, but domestic demand is going through the roof, with a rise of 7.3 per cent, annualised, from January to March. The collapse in net exports is obscuring the scale of the boom. Perhaps the Asian chaos will still prevent the Federal Reserve from raising interest rates. Indeed, maybe the Fed will remain cowed by the possible consequences of precipitating a Wall Street correction before the mid-term elections. But the domestic case for tightening (the Fed next meets on June 30) is becoming unanswerable, although the threat is being largely ignored by the markets. This is not a comfortable environment for Treasury bond investors, nor for the stock market, with corporate profits being mangled between stagnant prices and rising costs. Internationally, though, bond market trends remain favourable. The pattern of reduced government bond issuance applies to most developed economies: according to Barclays Capital, net annual G-10 issuance (excluding Japan) collapsed by 60 per cent between 1993 and 1997. Even in Japan oversupply is no problem, with savers craving security: the yield on the seven-year benchmark bond No. 182 has fallen to 1.13 per cent. Japan experienced it first, but now the deflation bandwagon is beginning to roll elsewhere. As Asia goes into recession the output gap is widening further. The commodity price indices are hitting four-year lows. If the Fed feels obliged to stifle US pay and asset price inflation, the impact on aggregate global growth could be severe. It all looks distinctly promising for creditworthy bonds, although US Treasuries may have local difficulties to overcome in the short run.

To: Ahda who wrote (12559)	6/3/1998 3:43:00 PM
From: Eldon Slife	Read Replies (1) \| Respond to of 116815

Darleen I am an insurance broker in the Kansas City metro area and I am consistently seeing at least 8-10% increases on health insurance renewals. These numbers will be much larger if the firm has any serious medical conditions but then we would be looking at situations that would be other than inflationary. Again, the above numbers are probably very conservative. We do know, however, that we don't have any inflation in this country because our government tells us so. Eldon