FURTHER DECLINES IN U.S. DEBT FUTURES POSSIBLE
After an already steep fall in the past
week, U.S. interest rate futures may be in for further declines
in the near term, financial analysts said.
    However, some analysts said recent sharp losses in bond
futures have left the bond market somewhat oversold, and the
contracts on long-term debt could stage a recovery before
resuming their decline.
    Key to the near-term direction of futures will be the
course of the dollar, they said.
    "As the dollar goes, so goes the bond market," said Dean
Witter analyst Karen Gibbs.
    The recent decline in the dollar, which hit a 40-year low
against the Japanese yen Monday, was reversed Wednesday when
several large U.S. money center banks unexpectedly raised their
prime lending rates by a quarter point, to 7-3/4 pct.
    "Even though the prime rate cut was good for the dollar,
foreign exchange traders are not convinced the dollar decline
is over," Gibbs said.
    The dollar decline was key in recent weakness in debt
futures as it rekindled concern about a pickup in inflation.
    Indeed, the falling dollar may have been a key topic at the
meeting of the Federal Reserve's policy making arm, the Federal
Open Market Committee, this week, analysts said.
    "To the Fed, the combination of a falling dollar, a
steepening yield curve, and rising commodity prices look
suspiciously like the traces of expectations of accelerating
inflation," said Denis Karnosky, analyst at Carroll, McEntee
and McGinley Inc.
    Such expectations could mean that "a shift in policy toward
restriction of bank reserves is likely to get very serious
consideration," at the FOMC meeting, he said.
    Any such restriction of reserves will not be a highly
visible form of monetary tightening, Karnosky said.
    Rather, the key to detecting a change will be found in
seasonal and adjustment borrowing at the discount window, he
said. Borrowings have held near a weekly average of 300 mln
dlrs over the past several months, he said.
    In the meantime, however, "the market looks a bit
oversold," said Jim Wysoglad, analyst at Golden Gate Futures.
    Wysoglad said a recovery from the oversold condition could
drive June bonds to a high near 99 before falling back to test
chart support near the recent low of 97-13/32.
    Technician Leslie Keefe of Technical Data Corp of Boston
said that the key test for June bonds will be whether the
nearby contract holds above chart support at 96-24/32.
    "All previous selloffs since mid-November have stopped and
buyers have surfaced at that level," Keefe said.
    If that level is broken, and the dollar continues to
decline, Keefe said she expects the June bond contract to
decline to test support between 92 and 93, the primary uptrend
line dating back to 1984.
 Reuter
