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FEDERAL HOME LOAN BANK OF NEW YORK SEES CONTINUATION OF BOND RALLY

 FEDERAL HOME LOAN BANK OF NEW YORK SEES CONTINUATION OF BOND RALLY
 NEW YORK, Aug. 3 /PRNewswire/ -- Eugene J. Sherman, chief economist of the Federal Home Loan Bank of New York, today offered several explanations for the recent bond market rally.
 "Since the last week of May, interest rates have declined sharply across the board," Sherman said. "Yields on 30-year Treasury securities are down by about 50 basis points; yields on two- to five-year maturities are down a stunning 100 basis points or more. A number of factors have contributed to this rally. Understanding it is necessary for gauging the direction of the market from here.
 "First, and most important, the economy's growth rate has been sluggish with little prospect of an early acceleration. Gross domestic product in the second quarter grew at an annual rate of only 1.4 percent, down from the 2.9 percent rate of the first quarter. Looking forward, there is little to suggest a revival. Measures of consumer confidence and sentiment declined sharply in July. Without a pick-up in consumer spending, the economy is unlikely to show renewed vigor. Nevertheless, all is not gloom. Sales of new one-family houses in June rose smartly after four months of declines, an encouraging sign but not enough to make a significant dent in the supply of unsold homes. Meanwhile, sales of existing single-family homes continued to erode slowly. Elsewhere, factory orders and shipments in June rebounded broadly, more than offsetting the May declines. So, there are enough elements of strength to keep the overall growth rate on the plus side, but just barely.
 "Second, and also important for the rally, inflation continues to decline. The deflators in the second quarter were all below 3 percent, and in some cases well below 2 percent. Furthermore, the personal consumption deflator for June rose a mere 0.2 percent for the third month in a row. Separately, the employment cost index reported for June showed further diminution. The year-over-year rate of increase for the second quarter was 3.6 percent, a continuation of its steady decline.
 "A third factor has been monetary policy. The Federal Reserve has been accommodating as measured by the low federal funds rate and the high rates of growth of monetary base, adjusted reserves and M-1. M-2 and M-3 remain well below the lower limits of their target bands. But that can almost certainly be explained by the public's preference for higher yielding assets that are not included in M-2 and M-3, such as bond and stock mutual funds.
 "Still further explanations of the decline in interest rates can be found in asset and liability management. Commercial banks have added enormously to their holdings of Treasury securities, increasing them at double-digit rates for five consecutive months. They have done this while reducing total loans, especially business loans. Indeed, holdings of Treasury securities by banks now exceed business loans outstanding, a reflection of absence of demand for business credit and concerns over credit worthiness. The mirror image of bank asset management is corporate liability management. Corporations have been issuing bonds and stocks and paying down short term debt. So, the effect of the unwinding of the leveraging excesses of the 1980s has been to reduce private sector short term business credit outstanding and channel funds into high quality securities.
 "As mentioned, individuals have been pouring money into mutual funds in search of yield and growth, with the bond funds gaining the lion's share. Those fund managers have had no choice but to invest in high quality securities.
 "We see nothing on the horizon that is likely to change all of this soon. Indeed, with the stock market so high, a number of investment strategists have recommended a reapportionment of investment funds in favor of larger proportions than before for bonds and cash and less for stock. That should help bonds. With the dollar already low and many important stock markets abroad weak, we may see an inflow of foreign funds into U.S. securities in search of yield, safety, liquidity and an already low currency. There may be some life in the rally yet."
 The Federal Home Loan Bank of New York provides low-cost financing and other banking services to stockholding institutions in support of affordable housing for Americans in New York, New Jersey, Puerto Rico and the U.S. Virgin Islands.
 -0- 8/3/92
 /CONTACT: Eugene J. Sherman of Federal Home Loan Bank of New York, 212-912-4605/ CO: Federal Home Loan Bank of New York ST: New York IN: FIN SU:


GK-LD -- NY003 -- 5989 08/03/92 08:59 EDT
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Date:Aug 3, 1992
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