One of the curious aspects about Central Bank influence on interest rates is that the only one they can just "declare", and then impose through direct market intervention, is the overnight rate. The rest of the yield curve is in the hands of the market, and that market has lifted the ten-year USD T-Bond rate by 125 bp over four months. This is "simply" the reflection of the general acceptance that recovery is underway, and that inflation and interest rates must rise, albeit modestly. The Fed may well delay raising its short-term rate, in recognition that unused production capacity means low inflation rates. The Fed is therefore in no hurry to tighten and slow the recovery. We have therefore been recommending that bond portfolios keep their average maturities short, a view we cannot yet change, but which we are keeping under review. We suspect that long-term rates are ahead of themselves and may come back down just as the Fed moves short-term rates up. Then we shall recommend bar-belling, but not before.

Make no mistake, a Fed rate of 1.75% is totally abnormal. Historically, the Fed Funds rate has been an average of 2.4% higher than inflation. Currently this differential is just about zero, suggesting a lot of catching up to do. However, again looking at history, such catching up has been slow: a matter of years, not months. How slow this time? We suppose much as in years gone by, but we have to keep alert.

Now consider the ten-year rate. It provides the most useful starting point for mortgage rates and for comparing bond yields with stock market yields. Two significant points have been reached:

• The cost of mortgages has risen to a point where refinancing private housing is no longer so attractive, and the rate of refinancing is falling off sharply. Thus the spare cash that US consumers have been able to generate from their property value increases is disappearing. This cash shortage will wash through (negatively) to consumer spending.
• The ten-year yield on Treasuries has moved ahead of the average earnings yield of the S&P500, when adjusted for the long-term average differential between the two. (Earnings yields are very low, at about 3% because investors hope for share price growth, so direct comparison of bond and earnings yield is inadequate -hence the adjustment for the long-term differential.) For the moment, the adjusted difference is tiny; both are at a little under 6%, but the trend that this heralds is that a period of stocks being cheap vs. bonds is now turning to one of stocks being expensive vs. bonds.

Where does this analysis lead us? In a sense, nowhere beyond where we have already been heading. It reinforces our view that the recovery will be severely constrained, that stock prices are vulnerable, that bonds are an essential component of capital protection and that capital in general just will not be able to earn the same rates of return it did in the 90's. We see the 00's decade as fundamentally weak in capital returns (much to the chagrin of pension funds).

The AOL Time Warner goodwill write-off has come through, at $ 54 billion, at even highly levels than originally announced. The power of the ratings agencies, perhaps in reaction to their being so slow with Enron, is hitting ABB hard, while a well known saying about statistics looks like changing to "lies, damn lies and corporate earnings". Even GE is fair game for criticism. It is at moments like these that our long-term philosophy that yield is better sought in sovereign markets than in corporates finds its justification once again. Yet another measure of how lukewarm the recovery looks is to be found in spreads narrowing throughout the bond market. This recovery is far from being "gung-ho", or corporate bonds would be more popular.

Poor Argentina goes from bad to worse, but, with regard to our preference for sovereigns, we could and we did see the disaster coming way ahead (and issued warnings!), whereas corporate disasters creep up like a thief in the night.

We are impressed by investor power (or City influence) convincing the UK Government that it could not just confiscate Railtrack without proper compensation for share and bondholders. Just as well, or the pro/business budget leaked from the Chancellor's office would look like a sick joke.

Finally, we note the continued poor outlook for investment banks as their deal flow remains so low. It is all part of the scenario of growth, yes, but not like before.

Recommended average maturity for bonds in each currency
Stay short and wait for Fed Fund movements to see impact at long end.

Ahead of Easter and month end, the market remains in relatively tight trading ranges. Encouraging economic numbers but disappointing corporate results, trade barriers being imposed and mounting pressure on the Bush administration about the high dollar policy, all raise a big question about whether a major change is about to take place. Is Mr. McDonough (New York Fed) paving the way and preparing the market in saying that the dollar on a "theoretical" basis might be too high? The ultimate authority for monetary policy is the US Treasury Department. They are well aware of how much the USA relies on foreign capital.

On Monday, Japan will release the Tankan, most probably showing that the economy has stoppoed declining and that exports are starting to pick up. Thanks to the artificial support of the equity market, a major financial crisis has been avoided for this fiscal year end, or, rather, again been postponed.

EUR/USD: Same comment as last week: it looks like a broad consolidation band of 0.8550 to 0.9030 will remain for the foreseeable future. A clear break above 0.8880 might help the Euro to test the upper side, direction 0.9000, while a move below 0.8780 would speak for a downside test again.

USD/CHF: Same comment: our price objective around 1.6500 was quickly reached. Below that level, there is good buying interest. A break at 1.6780 on a weekly basis is needed in order to retest 1.7000.

USD/JPY: The US unit has created a solid base above 130.00 and the bottom has gradually moved higher in recent days to 131.50. Consolidation in a 131.50 to 133.50 range is expected, with a break of either side looking for a next move of 100 to 150 pts. A move below 130.00 would be catastrophic.

EUR/JPY: The exchange rate is now well established above 115.00 and remains in a clear up trend, with 116.50 followed by 117.50 and 119.-as the next targets. Key supports are at 114.80 and, more important, at 114.20.

USD/CAD: We keep our short position USD/CAD at 1.5955, with a S/L at 1.6300. Price objective is still around 1.5650.

AUD/USD:The rally in the Aussie has stalled in the 0.5330 area for the time being. Only a weekly close above this level would speak for further Aussie appreciation. direction 0.5450. Consolidation is expected first. Key support 0.5210, 0.5150 and major 0.5050.

GBP/CHF: Having spent the last ten days below the key resistance of 2.3850, the GBP has recovered once again. A weekly close above this level would open the door for 2.4000 followed by 2.4250. On the downside, 2.3500 and 2.3350 remain key supports.