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Inflation Fear Pushes Bonds Down

THE US bond market is singing the blues these days - worried about a possible adverse impact from a Bill Clinton victory next week. Interest rates have started to climb while bond prices (which simultaneously move in the opposite direction) are falling.

"There's probably no love at first sight" between the bond market and a Clinton White House, says David Wyss, an economist with DRI/McGraw-Hill in Lexington, Mass.

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The stock and bond markets have diverged in recent weeks, moving often in opposite directions. The equities market is moving upward, with the Dow Jones industrial average finishing out last week at 3,207.64 points. That translated into a net gain of 33.25 points for the week. Many stock investors believe that economic expansion measures are likely under a Clinton White House. That is good news for such sectors as construction, health care, energy, and antipollution firms.

But the bond market is clearly skittish about that very same prospect of growth, fearing that expansion will enlarge the deficit, push up interest rates, reignite inflation - and lower the value of existing bonds. This is prompting many investors to sell bonds.

In some cases, investors are selling off US Treasury securities and buying mortgage-backed securities, which carry more attractive yields. Prices of long-term US government bonds tumbled some $2.50 for each $1,000 in face value last week. Yields on 30-year Treasury bonds are now around 7.63 percent, up from 7.57 percent a week ago. Inflation currently stable

Some economists say that the fears of the bond market are exaggerated and that there is little likelihood of a major resurgence of inflation.

"Interest rates are not going to move much between now and next summer," Wyss says. Even if Clinton quickly proposes an economic-stimulus package, it might not fully clear Congress until spring, Mr. Wyss says. Then, such a program wouldn't really take effect within the economy until late next year. The result, Wyss says, is that "whatever impact a Clinton program has on interest rates and inflation wouldn't be felt until late next year at the very earliest." Interest rates steady

A number of economists surveyed by Blue Chip Economic Indicators, a Sedona, Ariz., newsletter, also conclude that interest rates and inflation will not climb much during the next year. Thus, three-month T-bills are expected to average 3.4 percent in 1992, but only rise to about 3.5 percent for 1993; corporate triple-A bonds will have a yield of about 8.1 percent this year, and stay about the same next year.

The economists estimate that inflation will come in at about 3.1 percent this year and climb to about 3.2 percent next year. For the first nine months of 1992 the consumer price index is running at a 2.9-percent annual rate.

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Randell Moore, executive editor of the Blue Chip newsletter, notes that the publication's latest survey of economists was taken before political analysts began to talk of a big Clinton win in the electoral college. Mr. Moore says that inflation and interest rates will not jump much, given existing weaknesses in the economy. Bonds will recover

Despite upticks in interest rates during the past few weeks, many investment houses hold that the bond market will eventually settle down. "We do not have any major concerns about interest rates at this time," says Dennis Jarrett, chief market analyst for Kidder, Peabody & Co.

The current nervousness by the bond market, Moore says, is somewhat of a "hiccup," reflect-ing unhappiness with the failure of the Federal Reserve to make additional cuts in short-term interest rates as much as anxiousness about the Clinton stimulus program. Moreover, the modest size of the likely Clinton program - usually estimated as between $25 billion and $35 billion - is "a drop in the bucket in a $6 trillion economy," he says.

Unemployment is not expected to come down much in the next few months, which will depress demands for higher wages (and hence inflation).

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