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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (1431)	3/7/1999 10:15:00 PM
From: porcupine --''''>	Respond to of 1722

Beyond the Bounce in Bond Yields By KENNETH N. GILPIN Maybe it's the weather. Or the post-Christmas, pre-April 15th blues. Whatever the cause, over the last 15 years bond traders have tended to push up interest rates, in some cases quite sharply, in the first few months of the year, and in the process have unsettled markets. The impulse hasn't lasted long, though, because rates have been in a general decline since the early 1980s. Much to the chagrin of equity investors and would-be home buyers, bond yields have moved up again this winter, with the 30-year Treasury at 5.60 percent. Worries abound that the Federal Reserve will exacerbate the trend by tightening credit conditions. Ian A. MacKinnon, a managing director of the Vanguard Group and head of its fixed-income funds, spent some time last week to share his views on the state of Bondland. Q. What is your explanation for the recent increase in interest rates? A. In the fall, after Russia defaulted and Long-Term Capital almost collapsed, it looked like the world was going to hell in a handbasket. The Federal Reserve Board responded by cutting short-term interest rates three times. But there was a feeling the Fed would need to do more. What we have seen over the last several months is a dissipation of that feeling. In the Treasury market, that has led to the unwinding of flight-to-quality positions established during the crisis. Q. So bond traders are putting primary importance on what is happening in the American economy? A. Last fall there was a feeling the economy would falter. But it has proven to be amazingly resilient, impervious to any sort of shocks from abroad. So the bet no longer is that the economy will weaken. If anything, people are now factoring in some fear that the Fed will tighten monetary policy. But we don't think that is going to happen. The Fed is blessed with a miraculous economy that will grow at a 3 percent rate this year with no inflation to speak of. Over the last four or five months, long-term Treasury bond yields have risen by almost a full percentage point. But in no way has the inflation outlook worsened by that much. Treasuries represent a very good bargain relative to inflation. Q. Corporate and municipal bond yields didn't fall much at all last fall. How have those groups held up during the recent rise in Treasury yields? A. When there was the flight to quality, all of it went into Treasuries and virtually nothing into corporates. So Treasuries have backed up in yield and corporates have been pretty stalwart in the face of that. In fact, corporate securities have outperformed Treasuries quite significantly over the last couple of months. And with expectations that the economy will do better this year, corporates ought to do pretty well. Q. Which sectors of the investment-grade corporate bond market do you like? A. In certain sectors, like real estate investment trusts, you can get bonds with yields of close to 7 percent. We also like electric utility bonds, and companies in some cyclically insensitive areas, like telecom, cable and supermarkets. All of those ought to do pretty well this year, given that we are looking for moderate-to-brisk growth in the economy and no acceleration of inflation. Q. Last fall, the thinking was that we might fall into a recession in 1999. As you said, that is no longer the prevailing wisdom. Shouldn't a growing economy be good news for high-yield junk bonds as well? A. Yes, it should. The only caveat with junk is you have to be mindful of the earnings pressure these companies are under. Q. Last fall, interest rate spreads between Treasuries and high-quality municipal bonds disappeared. Are munis still a buy? A. Municipal bonds are still attractive, but not as attractive as they were for weeks and weeks during the fall. Now, with the backup in Treasury yields, AAA municipal bonds yield about 92 percent of Treasuries. If your perspective is longer than the last six months or a year, that is screamingly attractive. But for weeks and weeks last fall those yields were 102 percent of Treasuries. Still, an insured municipal bond due in 2020 can be had at a 5.10 percent yield. For people in the 28 percent tax bracket, that is a pre-tax equivalent yield of 7.10 percent. So there are still good deals. Q. Given your economic outlook, have bond yields reached their peak? A. Yes, I think they have, and I think you will see them move lower during the spring and summer. But I see a couple of speed bumps. One is Y2K. I think there is some likelihood companies will beef up production before year-end, and that the increase in inventories will artificially boost gross domestic product, perhaps by one-quarter percentage point or more in the fourth quarter. That might frighten the market. Also, if we continue to see robust strength in employment, that would make us less positive. Copyright 1999 The New York Times Company

To: porcupine --''''> who wrote (1431)	3/7/1999 10:21:00 PM
From: porcupine --''''>	Respond to of 1722

Why Japan Is Rooting for China By SHERYL WuDUNN -- March 7, 1999 TOKYO -- LAST year, Japan seemed to bite its lip as it watched China's economy continue to boom. Japan was suffering its worst slowdown in more than half a century, and its rival was the only Asian country to survive the Asian economic crisis with its reputation enhanced. Commentators made invidious comparisons between Chinese decisiveness and Japan's inability to confront its economic problems. All this was hard to take in Japan, Asia's largest economy, and it hurt even more when President Jiang Zemin made a state visit in November -- the first ever by a Chinese leader -- and told Japan how terrible it had been in World War II. Nobody wanted China's economy to collapse, but there was a bit of a yearning for China to stumble and learn its vulnerability. Now that has happened. China's economy is showing signs of frailty, even though officials still hope for economic growth this year of 7 percent. And Japanese business executives and economists are finding that they are looking at China's economy these days not so much with resentment or envy as with apprehension. "I'm very nervous about them following the same path as the Japanese economy in the next five years," said Takashi Hoshino, a China specialist and director for research at the Institute for Socio-Economic Infrastructure and Services here. "There are very big problems in China. In particular, the situation of the financial sector -- the banking problems -- their situation is quite similar to Japan's recent experience." There are also huge differences. Japan's economy is more than four times the size of China's. China can still enjoy catch-up gains that are unavailable to Japan. But some Japanese see in China a bit of their own experience. China has enjoyed the go-go growth that Japan went through in the 1980's. But since Japan's speculative economic bubble burst in the early 1990's, it has taken eight years for the nation to come to grips with fundamental problems that still need to be solved. As a Communist country trying to make the transition from command economy to the market, China obviously has problems Japan never faced; its dying state sector claims about 40 percent of total economic output. Japan, with 120 million people, can tap into a savings pool of $9 trillion. China, with about 1.2 billion people, does not have nearly as big a savings pool. But China also has the creeping burdens that have plagued Japan: Government spending on public works to boost growth, a practice of lifetime employment, growing public debt and a broken financial system. China's economy is expected to grow this year, while Japan's is going to have to fight to reach zero growth. But like Japan, China is facing the threat of deflation, as prices begin to sink, as factories become idle and as inventories rise with products no one wants. With ailing state businesses trimming wages and workers, Chinese consumers are increasingly worried about the future, hoarding their money, rather than spending it, which would help boost nationwide consumption. As in Japan, the only big spender in China is the Government, which is pouring money into concrete, bricks and mortar for bridges, dams and other projects, even if they crumble thanks to hasty construction or corruption. A ND as in Japan, China's spending is swelling the budget deficit to record levels. And the banking system, buckling under bad loans amounting to 30 percent to 40 percent of the nation's total economic pie, is reluctant to lend. China, like Japan, is caught in a credit squeeze. "People are very jittery," said Fred Hu, a China economist at Goldman Sachs in Hong Kong. "They are moving from a world of cradle-to-grave welfare system to a very uncertain brave new world." Economic relations between China and Japan are complicated by more than a century of profound political and military antagonisms. Many Chinese are irritated that Japan has not apologized more forthrightly for World War II atrocities. Even today, many young Chinese say with remarkable bluntness that they hate Japanese people. Some Japanese worry that China could become a militarist bully in the next century the way Japan was in the middle of this one. "China can become as militaristic, as expansionist and as arrogant as we were," said a Japanese legislator who travels to China regularly. The possibility that the two largest economies in Asia could both be ailing troubles many economists. Many Japanese recognize that growth in China would help maintain stability in the region by maintaining the flow of trade and a firm exchange rate. "We are not in the habit of rejoicing in the misfortunes of others," said Sakaaki Numata, a spokesman for the Japanese Foreign Ministry. "And I'm not quite sure what is happening in China can be described as misfortune just yet." Copyright 1999 The New York Times Company