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Bogeyman stays his hand

By Hal Paul and Dave Liedtka

Financial futures suggest now is as good a time as any to buy bonds. That's because the bogeyman of the fixed-income markets, the Federal Reserve, isn't expected to raise interest rates when policymakers meet on Tuesday, or for that matter in July and August.

"There is nothing in the short end of the market through 90 days to suggest investors are demanding a premium in return for the risk of higher interest rates", said Frank Rachwalski, manager at Scudder Kemper Investments. "It says the Fed is on hold for a while."

Tame inflation and signs that Asian economies are headed for a fresh bout of turbulence are likely to stay the Fed's hand, which may be reluctant to risk aggravating Asia's woes with a rate increase that could pull money out of the region.

Low borrowing costs have sent US stocks to records this year, and indications are that more gains are ahead as investors gear up for the second half of 1998.

"I don't think the Federal Reserve wants to kill this market," said Greg Smith, chief investment strategist at Prudential Securities.

"It would be very hard for the Fed to raise rates without some hook of inflation to hang it on."

Weak earnings could slow the rally, however. A number of high-profile companies, including Hewlett-Packard and National Semiconductor told investors last week that profits would disappoint expectations.

Investors will be eyeing earnings from Dell Computer and Novell this week for further signs of a slowdown in the computer industry.

The Dow Jones Index rose 0.5 per cent, to 9096.00 last week, registering an all-time high of 9211.84 on Wednesday. The 30-stock average is up 15 per cent this year, putting it well on course to rise more than 20 per cent for a fourth straight year.

The US economy is booming now; it grew at an annual rate of 4.2 per cent in the first quarter. Fed officials say anything faster than 2.5 per cent risks accelerating inflation. Investors expect the pace to slow, though.

"I don't think first-quarter growth is sustainable," said John Grib, a fund manager at Investment Counsellors of Bryn Mawr.

The rapid pace of mergers and acquisitions isn't expected to let up. The S&P Auto Index climbed 3.4 per cent last week, spurred by the announcement on 7 May that Germany's Daimler-Benz and Chrysler would merge.

"I believe mergers are going to continue in a big way in the US," said Michael Price, president of Franklin Mutual Series Fund.