Bonds

T-bonds slide 4-5 points in March, with corporates holding up better. Bonds look good, but T-bonds are expected to suffer from renewed inflation fears, dollar weakness, deficit concerns and maybe big foreign selling.

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Outside of the 10% move in 30-year zeros (premium widened), the bond market in February was a quiet affair. In terms of the bond market, it was a good month to be on vacation. I didn't miss much.

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After an early December sinking spell, the bond market kind of floated higher for the rest of the month, closing out 1987 just slightly below its fourth quarter highs.

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Much has been made about the CRB Index making a new high on November 27. We are very skeptical. Comparisons herein will demonstrate the warping in this index. I think we are now getting an inflation false alarm, but at this point the signals are mixed.

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After an ominous five-point sell off in the first part of October, the Treasury market turned on a dime and blasted upward, running up 10 points in four days. But not all bond market sectors participated. It was a flight to quality.

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The bond market held its own in the middle two weeks of September, but the first week and the last week of the month were downright nasty.

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The bond market edged tentatively higher in the first half of August, but lost it all in the last two weeks of the month. T-bonds made new lows for the year in the last days of August.

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The bond market held Its own for the first few weeks of July, but prices took a sharp dive on July 21 and drifted lower for the remainder of the month.

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The bond market entered June with a sharp one day sell off and then spent the best part of the month edging higher. However, in the last week or so, bond prices drifted lower in a relatively dull market.

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For the time being, negative pressures seem to have subsided for the bond market. We don’t think the decline in bond prices is over, but June should allow for a little rest and rehabilitation on the part of the players.

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April couldn’t have been much crueler. Even with the rally from near panic lows, long T-bonds lost 6-7 points for the month, as did long municipals. Corporates held up a little better, dropping only three or four points.

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Bonds rallied strongly in June but did not make new highs. However, it is only a matter of time. Look for a test of the highs in July. Also, introducing “Inflation Watch,” a new regular feature that will report on our ongoing inflation research work.

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For the month the bond market, except for Municipals, ended just slightly lower than it started.

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1985 was a vintage year for bonds, with long bond total returns more than matching the big publicized move in equities.

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About half the April gain to peak levels was lost in the last few days of the month. Short-term, a long T-bond trading range of 11.30%-11.70% is expected, but the Major Trend remains bullish. A break in the deficit impasse could kick off a new upsurge.

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We look for higher bond prices by the end of October, once the Treasury financing is out of the way. Pension fund lock-up buyers remain a strong positive factor. But what is really needed is some post-election indication of political fiscal responsibility.

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In some ways, the bond market is more impressive than the stock market. We continue to think it may be a brand-new ball game for a while with a growing number of new players. Throw out your old rule books? Our pre-election expectation for T-Bonds is 11%-12%.

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In many ways the bond market is more impressive than the stock market. In some ways I think it is a brand-new ball game with a growing number of new players. Throw out your old rule books. We have raised our maximum pre-election expectation for T-Bonds to 10%, up from 11%.

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T-bonds at their recent lows were down 30% from peak levels. Yes, it has been a bear market, but it may be about over. At minimum, a move to a 12% level is expected before election day.

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I expect Zeros will make a bigger splash in pension circles over the next twelve months than did GIC’s, Index Funds, Venture Capital or Real Estate. Dr. Harold Ehrlich does not go quite that far, but he thinks Zeros should “be recognized as being among the most important financial instruments ever invented.”

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