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To: JRI who wrote (107188)	3/4/1999 4:28:00 PM
From: Lee	Read Replies (1) \| Respond to of 176387

John,.Re:. I think you would agree with me that a 5.70% 30 year...with 1.5-2.0% inflation...representing a historically (very?) high real rate.. Every year since '93 or '94 we've heard that so-called real rates are historically high compared with inflation. But the yield doesn't just represent an inflation premium. It's also a risk premium for the way in which the US conducts fiscal policy. For years, we've been a debtor nation and run large trade deficits along with questionable fiscal management. In order to finance this kind of management, buyers of debt should also receive a premium which compensates for the increased level of risk. This is what the yield represents to me. We heard for years, especially from Germany, about our shaky fiscal policies so it's natural to suppose that anyone buying our debt would expect some kind of premium to compensate for this perceived additional risk. I don't know if this explains it well but that is how I view yield. If we continue with a real budget surplus and manage it accordingly, I would expect the risk premium to decrease over time. Re:.I think the market still doesnt understand that we can grow faster nowsdays (absent inflation) due to technology vs. smokestack (and other factors). I think some of the Fed does understand this since they would have raised rates last year had they stuck hard and fast to the Phillips Curve algorithm. Re:.It is my opinion that if rates were to go lower, say in the range of 5.25-5.50, investors would feel more comfortable with stocks (even if they believe they are overvalued) I think that since the financial stocks have started to rally, and since a 5.7% yield begins to be competitive with stocks if earnings are only in the 6% range, that long rates are more or less in line with current economic conditions. If you remember, when rates got as low as 4.7% last summer, the financial stocks literally got killed. They can't survive at those rates. Now either earnings have to grow or the bond will become a viable alternative in the near term. As it should be IMHO. Regards, Lee