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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Robert Douglas who wrote (6668)	9/24/1998 2:22:00 PM
From: Henry Volquardsen	Respond to of 9980

Robert, Interesting question. Before this weekend I was getting prepared to short the bond market right after a Fed ease. The bond market is factoring in a huge cut and once one occur the market will realize how far over priced it is. In addition their is the issue you mention of the inflationary implications of the Fed easing while the economy is still relatively healthy. Now with a number of factors effecting the market that make be believe that we will see some very nasty losses in the global banking system I am beginning to believe that after an initial sell off the market is likely to focus on the potential that the Fed will be forced to ease again in the not to distant future and start discounting another cut. I'll discuss the British case in a separate post. Henry

To: Robert Douglas who wrote (6668)	9/24/1998 2:31:00 PM
From: Henry Volquardsen	Respond to of 9980

Robert, The British bond market is an interesting situation. If you look at forward yield curves you will see that British rates on a five year forward start basis are pretty close to German rates on the same basis. This is telling us, I believe, that the market is forecasting that sterling will join the Euro within five years. If this is so then want we are witnessing in sterling is in fact two yield curves. A two to three year curve that reflects domestic considerations, thus short term rates increased to fight inflation. The second curve, beyond five years, is a composite reflecting German bond yields and short term sterling funding costs. If you watch the British market you will see that it does respond to a combination of the two, at least that is the way I am trading it. Henry