Bond Markets Fool Experts
In the face of more apparent firming by the Federal Reserve, the bond markets fooled the experts by advancing in price. Federal funds traded as high as 8 Vi percent on Thursday begging the question of of whether funds are somewhere between 8 and 8 Vi percent.</br></br>Paying little attention to the Fed s moves earlier in the week (the 8 percent level for funds was definitely established). investors eagerly sought most new Issues. This occurred because many investors still have ample funds to invest, and many still feel that rates either have peaked or are close to the top. Also, rates are historically high, and many of the negotiated issuesÛÓespecially the large municipal revenue Issues ÛÓwere priced attractively to sell.</br></br>However, the near-term future of interest rates will be determined by the direction of the economy in the third quarter and by the administration's package to defend the dollar In the foreign exchange markets. So far. the economy is showing more strength than many had expected, aided by the continued growth in housing. In essence, the new six-month savings certificates that became available m June have provided the thrift institutions with the necessary funds to continue mortgage lending in the face of disintermediation.</br></br>Defending the dollar will be most difficult because it will require a significant reduction in our balance of payments defecits plus the curtailment of Inflation. In fact, the flight from the dollar is symptomatic of the inflation that exists in the economy.</br></br>Lebherz is the manager of the Washington office of Carroll, McEntee & McGinley Inc. He has 18 gears experience in fixed income investments.