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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (24322)	3/15/1999 10:49:00 AM
From: IQBAL LATIF	Read Replies (1) \| Respond to of 50167

Long-Term Rates at a Near-Term Peak Analysis by Mark Zandi Written March 8, 1999 Long-term interest rates have soared since late last year. The yield on the 30-year Treasury bond, which was trading as low as 4.7% at its nadir during the depths of the global financial crisis in early October, is currently trading at over 5.5%. Related Info Fed Employment CPI Mortgage Calculator Higher Treasury yields have quickly pushed mortgage rates higher. According to Freddie Mac the fixed mortgage rate is back over 7% for the first time since last June. The rise in long-term interest rates is due in large part to the realization that the Fed will not ease monetary policy anytime soon. Financial markets have even attached a somewhat higher probability to a Fed tightening than an easing. The implied funds rate in the fed funds futures market is almost 4.9% by June. The funds rate is currently 4.75%. This is a dramatic departure in sentiment since the beginning of the year when it was widely thought that the Fed would have to continue to ease monetary policy to offset the expected drag from the weakening global economy. The U.S. economy has remained surprisingly resilient to the problems in overseas economies, however, experiencing astonishing growth and increasingly tight labor markets. Long-term interest rates have also backed up as the global flight-to-quality into U.S. securities markets has moderated. More stable global financial markets have induced some investors to resume investing overseas. Japanese financial institutions in particular have been likely sellers of Treasury bonds as they dress up their balance sheets ahead of the March 31st end to their fiscal year. The capital adequacy of many Japanese institutions is determined at that time. Like all investors in U.S. securities, the Japanese have enjoyed significant capital gains on their U.S. bonds. Japanese assets also appear somewhat more attractive given the surge in Japanese long-term interest rates since late last year. Most if not all of the rise in long-term Treasury yields is over for the year, however. U.S. economic growth is expected to soon slow under the weight of a weak global economy and moderating consumer spending and business investment growth. The recent hike in long-term rates will also soon constrain growth by cooling the soaring housing and mortgage refinancing markets, which have been an important impetus for economic growth. Higher rates should also at the very least take some steam out of the high-flying stock market, another key source of economic growth. Higher long-term rates also remain unlikely given the still strong likelihood of another round of global economic and financial market instability. The Japanese economy is mired in recession, the Brazilian economy is plunging, and even the German economy is flagging. A more significant correction in the U.S. stock market will also support lower long-term rates as investors look for a place to park their funds. Concerns over the possibility of a significant economic disruption somewhere in the world due to Y2K will also support demand for the world's safest asset, U.S. Treasury bonds, as the year progresses. Substantially lower long-term rates, say below 5%, are also unlikely given that the U.S. economic expansion remains firmly in tact with exceedingly tight labor markets. Only a very serious implosion in the global economy and financial markets would induce the Fed to resume easing monetary policy, probably a necessity to get long-term rates back below 5%. Moreover, in the longer-run, the yield on the 30-year Treasury bond is expected to be near 6%. To see why consider that long-term Treasury interest rates are determined in a truly global financial market. Close to 40% of publicly-traded Treasuries are owned by foreigners. The real 10-year Treasury yield should thus be equal to the real return global investors would expect to receive on a risk-free asset, abstracting from any currency risk. This return is ultimately tied to the global economy's real growth potential, which is estimated to be 3%. Global investors should also be compensated for expected U.S. inflation, which is an estimated 2.5%. Nominal 10-year Treasury yields will thus be ultimately equal to the sum of the real global yield of 3% and expected long-run U.S. CPI inflation of 2.5%, or 5.5%. 30-year Treasury yields will ultimately be a somewhat higher 6% since the risks of holding a 30-year bond are substantially greater than a 10-year bond. These risks include the possibility of a depreciating U.S. dollar, which are high given the U.S.'s perennial and rising current account imbalance. The likelihood that the federal government will resume running sizable deficits sometime in the next thirty years is also high. Given the fiscal burden that will result as the aging baby boomers draw on Social Security and Medicare, U.S. government borrowing will likely rise significantly. The long bond is expected to trade between 5% and 5.5% through much of the rest of the year. While long-term rates have achieved a near-term peak, however, the nearly twenty-year slide in long-term interest rates is largely over.

To: IQBAL LATIF who wrote (24322)	3/15/1999 11:23:00 AM
From: IQBAL LATIF	Read Replies (2) \| Respond to of 50167

dismal.com

To: IQBAL LATIF who wrote (24322)	3/16/1999 2:13:00 AM
From: IQBAL LATIF	Read Replies (1) \| Respond to of 50167

NDX has a support at 2015 now and I will think that probably this will hold.. I will like to think that 10,000 will surprise many sitting on side lines, I would not do what majority would do I will wait and see that 300-500 point move before selling..I have this 1290 support on the March contract and 1301 on June to look at as far as these supports are maintained we go higher. The breakout from here is quite interesting but very convincing in terms of momentum and support.. I will like to use selling out of money long calls on NDX if 2015 is broken alongwith long calls on BKX ( both will hedge my long exposure)to buy SPH put options for April, the only surprise would be some big announcements I am looking at that front carefully. Nice to see AOL and others moving up nicely lets see if Yahoo hits 200 before expiry.