Originally created 01/18/98

Financial analysts offer mixed opinions on bond rally



NEW YORK -- The Asian financial crisis may be playing havoc on U.S. stocks, but it's benefiting bonds in a big way.

Bond prices are surging amid heightened demand for fixed-income securities from investors seeking a safe haven until international turmoil eases. Some are betting that prices will rise even further as interest rates continue to drop, thanks to super-low inflation.

The question now remains: Should more investors hop on the "bond-wagon"? Advice from the financial experts varies -- Some believe the bond rally isn't quite over; others think it's reached a peak.

Either way, most agree that when it comes to investing, timing is crucial, and those just now entering the fixed-income arena have clearly missed the mark.

"If you think bonds are good buys today, you must have loved them a year ago," said William V. Sullivan, chief money market economist for Morgan Stanley, Dean Witter, Discover & Co. "Not too many people were involved in the long-term debt market at the beginning of 1997."

If they had been, they could have made a tidy profit.

During 1997, bond funds in general posted returns of 8.67 percent.

Long-term Treasury yields have been slipping over the past few months. Low inflation (even rumblings about "deflation") and moderating economic growth, impacted partly by the Asian economic crisis, have helped keep interest rates down and fueled speculation that the Federal Reserve could even cut rates in the months ahead.

The yield on the benchmark 30-year Treasury bond fell below 5.70 percent in mid-January after hitting 7.17 percent in mid-April. Subsequently, prices, which move inversely to yields, have risen nearly $20 per $1,000 face value.

Shorter-term Treasuries also have registered a healthy price hike, along with a drop in yields. The 10-year Treasury now yields around 5.2 percent, while the one-year Treasury bill yields around 5.1 percent.

Not much difference between the 30-year, 10-year and one year. Those who track rates, call it the flat-yield-curve phenomenon.

Not surprisingly, many financial counselors advise investors to stick to bonds or bond funds with short and medium-dated maturities and avoid long-term maturities.

"Anyone who goes long term right now is making a bet that interest rates will continue to substantially decline," said Jonathan Pond, a Boston financial adviser and author. "What is the likelihood that we would see another 1 percent drop? I don't think so."

Gary Thayer, senior economist for A.G. Edwards & Sons Inc. in St. Louis, agreed, "It's not a time to be taking on a lot of risk just for a little extra yield unless people believe the Fed is ready to lower ... rates."

Mr. Thayer thinks the Fed will maintain its current monetary policy and hold interest rates steady in the near term because, "the economy right now is not sick. It's still pretty healthy." (Lowering rates is often seen as a way to spur economic growth by making borrowing less expensive.)

Some economists think the ongoing weakness in Asian economies and the currency devaluation there have helped the U.S. economy, to some degree. For one thing, it's keeping inflation in check by making Asian imports cheaper.

Those same pressures, however, could put a damper on corporate profits since the Asian markets may no longer be able to afford U.S. products. It already has hurt stock prices and the U.S. stock market in general.

While it's hard to imagine investors jumping into anything yielding below 6 percent after getting used to double-digit annual returns on stocks, many financial advisers see bonds as a safe alternative for now.

"I'd rather that people put some money into bonds now than all their money into stocks," said Mr. Pond.

Merrill Lynch & Co. recommends 55 percent of assets be in bonds, 40 percent in stocks and 5 percent in cash, according Lisa Cullen, an investment strategist at the brokerage firm. A year ago, it had a 50-40-10 asset allocation strategy, she said.

"We've been cautious on U.S. equities for some time," Ms. Cullen said. "We think now is a good time to get into bonds. Of course, it would have been better when the yield was at 7 percent, but who knew?"