Wall Street managers watch for lower rates

June 21, 1995|By ANDREW LECKEY | ANDREW LECKEY,Tribune Media Services

Not so easy, Alan Greenspan.

Although you've made it perfectly clear that you believe any potential recession probably will be a brief one, Wall Street isn't about to let you off the hook.

There's still a strong conviction in the investment community that a slowing economy will lead your Federal Reserve to cut interest rates this year.

That's why Jeffrey Vinick, manager of the $44 billion Fidelity Magellan Fund, is keeping one-fourth of his portfolio in rate-sensitive cyclical stocks such as Caterpillar Inc. and Deere & Co.

And that's why key economists still are factoring a rate decline into their bond market forecasts, despite your protestations.

"In spite of Greenspan's recent comments, I still think the Fed will cut rates this summer, not a lot, but by about one-quarter of a percent," predicted Martin Mauro, senior economist and fixed-income strategist for Merrill Lynch & Co. "Investors holding bonds should continue to hold, for there won't be a tremendous amount of price movement either way the remainder of the year."

Investors buying bonds should do so not with the idea of enjoying a capital gain, but rather for the traditional reason of obtaining income, Mr. Mauro added. The bond market will probably trade a bit lower with a somewhat higher yield the rest of this year. He doesn't recommend buying bonds beyond 10-year maturities.

The federal funds rate of 6 percent should decline to 5.75 percent by the end of July, sliding to 5.5 percent by year's end, he believes. Meanwhile, the 30-year bond now at around 6.7 percent will remain the same through July, rising to 7 percent by year's end.

"Greenspan commenting on the possibility of a recession helps the bond market in the longer-term sense because it continues to point out the economy is slowing," observed Ralph Norton, managing editor of IBC's Investing for Income newsletter in Ashland, Mass.

"Fundamentals haven't changed, but the bond market has pulled back to more realistic levels."

Mr. Norton expects the fed funds rate to slip to 5.5 percent in the next month, then to 5 percent by year's end. The long-term bond should rise to 7 percent by the end of July and will be around 6.5 percent to 7 percent by year's end.

Investors in bonds and bond funds must be on guard for volatility. A rate decline increases the value of bonds, while a rate rise decreases value. Long-term bonds, providing the highest total returns the past year, are especially volatile. Even if creditworthiness is strong, they're subject to significant price swings.

"Most bond fund managers have shortened maturities of bonds in their funds, and average durations are a little shorter than 4.5 years," noted Mark Wright, analyst with the Morningstar Mutual Funds investment advisory.

Among investment-grade taxable bond funds highest in total return (yield plus value of underlying bonds) the past 12 months, according to Morningstar, were:

* Benham Target Maturities 2020, Mountain View, Calif.; $121 million in assets; "no load" (no initial sales charge); recent underlying bond yield 7.11 percent; average bond maturity 25 years; up 28.26 percent.

* Smith Barney Investment Grade Bond A; $207 million; 4.5 percent load; underlying yield 7.14 percent; average maturity 26 years; up 20.85 percent.

* Managers Bond Fund, Norwalk, Conn.; $427 million; no load; underlying yield 7 percent; average maturity 22 years; up 17.36 percent.

"Financial markets anticipate future events much more than they used to, due to the lack of bonds in the market and overabundance of demand," said Kenneth McAlley, portfolio manager of UST Master Long Term Tax Exempt Fund. "I expect rates will stay about where they are right now."

Among top tax-exempt municipal bond funds available nationally over the past 12 months were:

* UST Master Long Term Tax Exempt Bond Fund, $85 million; 4.5 percent load; underlying yield 5.41 percent; average maturity 23 years; up 13.82 percent.

* Blanchard Flexible Tax-Free Bond, $20 million; no load; underlying yield 4.22 percent; average maturity 19 years; up 12.76 percent.

* Safeco Insured Municipal Bond Fund, Seattle; $9 million; no load; underlying yield 5.11 percent; average maturity 22 years; up 12.24 percent.

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