13 September 2001, 09:28 US bond market likely to see high volatility in coming weeks - analyst
TOKYO (AFX) - The US bond market, set to resume trading Thursday,
will see high volatility in coming weeks, as safe-haven buying yields
to liquidation of positions by the insurance sector, said Carl
Weinberg, chief economist at High Frequency Economics.
"We see a roller coaster ride in the bond markets," Weinberg said
in a research note, cautioning that long-term interest rates may rise
in the medium-term, after declining on safe-haven buying.
The Bond Market Association yesterday recommended resuming bond
trading Thursday at 8.00 am, with an early close at 2.00 pm New York
time.
In the near-term, "a lot of investors ... will sell equities or
move money into bonds," he said, noting the initial rally in major bond
markets after the attack on the World Trade Center Tuesday.
But a combination of selling by insurance companies and a decline
in US government debt retirement will likely follow this initial round
of buying, he said.
"After everyone is done buying bonds for safe haven, the insurance
companies start selling them to raise cash," to pay claims, he said,
adding that central banks should be ready to step in, ensuring an
orderly market for the liquidation of fixed-income assets.
Over time, it will also become clear that fiscal surpluses will
diminish as spending rises to finance reconstruction and improving
security.
"We can expect defense hawks in Congress to ask for and get big
increases in spending on defensive and offensive military systems, as
well as on intelligence," Weinberg said.
This means less federal debt reduction that previously assumed. The
White House last month estimated a 158 bln usd budget surplus for the
fiscal year ending this month, and a 173 bln surplus next year.
With a larger outstanding supply of government debt, long term
interest rates will likely rise over the medium term, Weinberg
concluded.
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