New York Market: The Asian effect takes hold

ASIA'S economic slowdown is finally washing up on US shores. That may trigger a bond market rally and send yields to new lows, a growing number of investors say.

"No one can stand up and say `I see the bottom here for the Asian economies,'" said Steve Guterman, at Salomon Brothers Asset Management, who predicts 30-year bond yields may fall to 5.5 per cent this year. "There's the potential for more weakness coming out of Asia and that's helping bonds."

US Treasury securities have traded in the narrowest range in almost 20 years since late January, as investors searched for hard evidence that turmoil across the Pacific will slow the US economy. They got it last week. Benchmark 30-year yields fell to the lowest in a month on Wednesday after a report showing the US trade gap swelled to its widest in six years in March.

Federal Reserve Chairman Alan Greenspan said Asia's financial woes are just now being felt in the US, and that the region's problems still may have "unexpectedly large negative effects" elsewhere in the world.

This means 30-year bond yields may soon break out of the 5.79 per cent and 6.07 per cent range, where they've been since 16 January.

Last week, bond yields fell 7 basis points to 5.90 per cent. "We'll be getting more in the bullish camp as the summer unfolds," said Michael Mullaney at Boston Partners Asset Management.

However, US stocks have little chance of reaching records until investors determine whether an expected pickup in corporate earnings later this year is fact or fiction. US stocks are up 14 per cent so far in 1998, leaving little room for disappointments.

"There is a level of risk in the market that doesn't give US stocks a great ability to endure surprises," said Karl Mills, a money manager at Jurika & Voyles.

Earnings for companies in the S&P 500 climbed just 1.5 per cent in the first quarter from a year earlier. Analysts expect profits to rise 4.3 per cent in the second quarter. Some investors are waiting to see the evidence of a rebound before they champion the merits of US stocks.

"We're focused on earnings, and would like to see some stronger results," said Charles Ritter, a money manager at Federated Investors. "Companies are having a problem raising prices while at the same time wages are going up, so that's putting pressure on [profit] margins."

Scepticism about earnings hurt major US stock indexes and averages last week. The Dow Jones Industrial Average gained just 0.2 per cent.

Copyright: IOS & Bloomberg