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To: long-gone who wrote (16535)	8/25/1998 6:53:00 PM
From: goldsnow	Read Replies (1) \| Respond to of 116791

WORLD BONDS-Turmoil may boost Europe's short end 10:53 a.m. Aug 25, 1998 Eastern By Henry Engler LONDON, Aug 25 (Reuters) - The turmoil in emerging markets, reaching from Asia to Russia and as far as Venezuela, has begun to affect short-term bonds in Europe, with a growing number of investors expecting a more positive outlook. ''I think everything is being dominated by the emerging market sector at the moment,'' said Elisabeth Afseth, an economist at Williams deBroe, a unit of Banque Bruxelles Lambert. ''The view at the moment is that we will see lower rates than what had been previously thought.'' Such optimism is expressed in expectations for where the European Central Bank will set monetary policy for the 11 nations joining the euro on January 1, 1999. Analysts say that judging by three-month Euromark futures, the market is pricing in a short-term ECB rate of around 3.60 to 3.70 percent at the end of this year. Official rates in Germany and France currently stand at 3.30 percent. Short-term rates in Italy and Spain stand at 5.0 and 4.25 percent respectively. From a trading standpoint, analysts recommended that investors stand to gain from being long short-dated to medium-term bonds. ''I suspect the risk is that rates go up by less than the markets are pricing in,'' said Michael Saunders, economist at Salomon Smith Barney. ''If the emerging markets continue to deteriorate, it is possible that rates would stay at 3.30 percent,'' he added. The disinflationary forces emanating from abroad have already been reflected in the longer-end of European and U.S. bond markets, with the U.S. benchmark 30-year bond currently yielding less than the Federal Reserve's 5.50 percent Fed funds rate -- a development which analysts say generally reflects an anticipated tightening in U.S. monetary policy. But in the United States doubts have grown over how much the economy will be harmed by the fallout in Asia and elsewhere and how that will impact monetary policy. While few are ready to predict an easing by the Federal Reserve, the idea is no longer as far-fetched as it was just a few months ago. ''The market seems to be extremely optimistic,'' said Cesar Molinas, bond strategist at Merrill Lynch, who was nonetheless more cautious than others in assessing the outlook for ECB policy and the direction of short-term bonds. ''The global outlook for inflation is very good, but there are risk factors around,'' he said, pointing to likelihood that the relatively low price for oil, currently around $11 per barrel, would move back up to between $14 and $15 per barrel. Moreover, there are still questions over how the ECB will define price stability, an essential factor in determining the scope for any rate rises. Many believe the answer lies with an inflation rate somewhere between 1.5 and 2.0 percent, but with ECB officials offering few clues, there is the risk that a tighter monetary policy might be necessary for the euro bloc. ''I think the market has got it wrong on how the ECB will work,'' added Molinas. ''This very low interest rate we have in the core countries cannot last for long unless the disinflationary scenario has a greater affect on Europe than we think.'' The one market which might be over-optimistic on the speed of any rate declines was Britain, where the Bank of England was seen adopting a cautious approach to any easing in policy, analysts said. ((International Bonds +44 171 542 7770, Fax +44 171 542 5285)) Copyright 1998 Reuters Limited.