Macro Monitor

May saw the T-bond market come down into our buying zone and we are buyers in this issue. We expect 7% on T-bonds before 1986 is over (now 8.50%) and maybe lower. The stock and bond markets do not have to move together as May clearly demonstrated.

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April was a consolidation month and we think there could be weakness in the last half of May, carrying T-bonds to the 8%-8.25% level. However, we look for 7% before 1986 is over and possibly even 6%.

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Incredible action again in March. Long T-bonds are beating stocks year to date. Short-term and long-term bonds look higher and don’t ignore the possibility of a “return to normalcy” (6%) in 1986. It seems unlikely, but it could happen sooner than even we had imagined.

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Incredible February action. 8% looks like a trouble zone for a while, but we still expect to see 7.5% or lower over the next twelve months. Traders should be selling some bonds around 8%.

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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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Long T-bonds have broken into single digit territory but not by much. However, all in all, bond market action was amazingly good in November, all things considered. Hold existing bond positions. Action on the deficit could bring a blow off move.

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The bond market is back up trying to punch through its old peaks of June, July and September 1985.

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A large trading range has developed which is likely to be unbroken for a while. Tactically, we would continue to use the 10.20%-10.40% zone (long T-bonds) for profit taking.

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The cyclical bull market may still live, but the best of the move is behind us. 9% T-bond yields may be realized in the next year or so, but in coming months not much upside action is expected from current levels.

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The cyclical bull market still lives, but the best of the move is behind us. 9% T-bond yields may be realized in the next year or so, but shorter-term not much upside action is expected from current levels with a 10.40%-11.40% range expected to prevail for a few months.

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The cyclical bull market still lives, but the best of the move is behind us. 9% T-bond yields should be realized in the next year or so, but shorter term not much upside action is expected from current levels. Actually, a correction seems more likely, maybe to 11.3%-11.5%.

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May was a dynamite month for bonds, with total returns of 9%-10% registered for most long issues. Long zeros racked up gains in excess of 20%. The bond market now is ahead of itself although the Major Trend remains bullish.

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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 remain bullish short-term, long-term and very long-term. T-Bonds are expected to move to 11.25%-11.50% before April is over.

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Bonds weren’t more fun in February. 5%-6% declines for the month were the rule at the long end. The expected correction in the bond market is underway and could be about over.

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Bond returns are not expected to keep pace with stocks over the next 6-12 months. Shorter-term we remain cautious toward the bond market, but would become aggressive should it appear Reagan and Congress are coming together on the deficit.

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While now uneasy about the shorter-term outlook for the bond market, our minimum 1985 target is 10%, perhaps even 8%-9% if the politicians really come to deal with the deficit.

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Our 1984 target of 11.5% for T-Bonds was achieved. Short-term we don’t know what to expect, but a consolidation or correction would not be a surprise.

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We are reprinting this article authored a few months ago by this true legend in his own time. Buffett presents two fantasy plans by which to deal with the current deficit situation, employing them as a device to demonstrate the absurdities and dangers inherent in current policy. Do you want to know why long interest rates remain so high? Buffett explains it and I totally agree.

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