Investors hoping for a recession rally in bonds in 1990 took a particularly long and winding road fraught with inflation hazards, global yield bumps, federal budget potholes and a Mideast desert detour.
But those who stayed the course were rewarded since a U.S. economic slide led to the current Federal Reserve credit ease and bond price surge."We have marched up pretty much in a straight line since last summer, and I think it's entirely due to a growing belief that the economy has gotten weaker and may get weaker still," said money market analyst Scott Winningham of Stone & McCarthy Research Associates Inc., in Princeton, N.J.
More gains could be in store, but that depends on how events play out in the Persian Gulf. A diplomatic solution or swift coalition victory would lift the market; prolonged warfare in the oil fields might hammer it.
Yet money managers seem to be strongly committed to bonds at this point, the feeling being that the U.S. economic recession is severe enough to offset most of the potential downside of a gulf war to liberate Iraqi-held Kuwait.
"Despite the situation in the gulf, the economy looks to be very weak and you have a very strong trend in bond prices," Winningham said. "I think probably most people are . . . basing their investment decisions on what they see the economy doing. That is probably the critical issue."
But William V. Sullivan Jr., Dean Witter Reynolds Inc. senior vice president and money market analyst, noted that the invasion and its consequences have made 1990 a particularly trying year.
"It was a dislocating and unprecedented factor and people didn't know how to react to it," he said. "This is unique. These are extraordinary circumstances."
Treasury bonds ended 1990 on a high note. The price of the long bond hovered around 105, its yield was about 8.25 percent. But the late surge did not even bring bonds back all the way to where they started.