Expert: Doug Ingram - 3/14/2000

Question
1) What effect has the expansion of the gdp had on the bonds supplied by the private sector and the U.S. gov`t?

2)How would the bonds market react to the election of either Gore or Bush (please explain both)?

3)Give one example of an economic event that could cause stock prices and bond prices in the same direction?  Also an event that would move them in opposite directions.


Answer
1.  The good economy (high production, low unemployment, controlled inflation, etc.) has stimulated private sector supply.  The Fed's actions have caused all bonds to retreat and spreads to widen.  We have an inverted yield curve now due to the lack of long-term supply from the Treasury.  This will lead to more private sector issuance that represents great value here.  Why?  The Treasury announced today another $1BLN buyback of long term debt.  The low long term rate (6.12% on the long bond), clearly shows that the market believes that Fed policy will work and inflation will be under control.  Not only in the U.S., but globally.  And, as rates fall on the long end, from lack of supply, the entire curve will perform, including the private sector.

2.  As long as congress remains Republican and Greenspan is in charge, I think there is no great difference.  If Gore wins and sways congress to big government policy, bonds will suffer.  (I don't see that).  Ultimately, bond yields will be driven by real rates of inflation and lack of Treasury supply.  This bodes well for bonds.  It's my opinion that the market is going to be better either way, but, more positive for Bush.

3.  The opposite direction is easy; a burst of the stock market bubble would lead to flight to quality and help bonds.  Very much like the Asian crisis in Fall 1998 and the fall of Long Term Capital.

A continued controlled growth economy could be good for stocks and bonds, as it was through most of the 1990s. Another event would be global deflation or a strong dollar leading to investment in U.S. bonds and equities.  A dollar crisis could cause both markets to fall.

Hope this helps.

Doug Ingram