Financial Markets Deal With Explosion Aftermath

Fate of `Clinton rally' in bond market is left open to question

FINANCIAL and security experts here expect the costs of last Friday's explosion at the World Trade Center to run into tens of millions of dollars.

"The costs will be very substantial," says Rosemary Scanlon, chief economist for the Port Authority of New York and New Jersey.

But beyond dollar losses - from lost wages, sales, the closing of a number of brokerage houses and commodities exchanges, and expanded security - there is a less tangible loss of confidence in existing security systems, Ms. Scanlon notes.

Scanlon was on the 67th floor of the World Trade Center when the explosion occurred. "I immediately knew it was a bomb," she says; "there was an enormous blast and the building shook. Everything that was supposed to work in an emergency like that didn't," she says. She recalls struggling down the stairwell to the 48th floor. "The stairwell was jammed with people and acrid black smoke was billowing up; we found it increasingly difficult to breathe."

Scanlon and a group of about 100 people left the stairwell on the 48th floor. After knocking out some windows for air, her group waited on that floor for about three hours before working its way downstairs.

The two main stock markets here - the New York Stock Exchange and the American Stock Exchange - were not directly affected by the explosion. But the city's five commodities exchanges, employing over 12,000 people, were forced to close around 1:30 p.m.

Bond prices fell slightly on Friday in light trading - in part a reaction to the distraction of the explosion. A number of major bond trading houses are located in or near the Trade Center.

For Wall Street, as well as much of corporate Manhattan, the disturbing question is how much additional security will now be required to prevent other acts of terrorism. Many companies, including banks and some investment houses, were forced to beef up security in the 1970s, following several earlier waves of relatively small bombings by various "activist" groups in New York.

Investors will be watching a number of key economic and political factors this week in deciding whether the recent bond market rally - the so-called "Clinton rally," as some analysts have dubbed it - has peaked. Market prospects

The market had begun to slow even before Friday's bombing. Most bond experts say the market was merely taking a breather; moreover, the slowdown in bond sales was said to be unrelated to Washington's upward revision in fourth quarter US economic growth. That revision was widely expected and largely discounted by the market.

While the White House has been taking credit for the bond market rally, arguing that it reflects investor approval of Mr. Clinton's budget deficit-tax increase program, some bond analysts are not so certain of the exact meaning of the rally. Some hold that the bond market is saying the Clinton program will over-stimulate the economy, and the US will slump back into recession, thus driving down interest rates and boosting bond prices.

"What we definitely would not want to see is a big drop in rates if long bonds drop below 6.75 percent," says Arnold Kaufman, editor of The Outlook, a weekly review published by Standard & Poor's Corporation. Yields on 30-year bonds are currently running in the 6.82 percent range, an all-time low. If rates fell too low, that would suggest "a risk of disinflation giving way to deflation."

Kemper Securities, based in Chicago, is one financial house that is skeptical about a continuing boom in the bond market. Last week the firm lowered its asset allocation model - that is, its proportional division of assets among stocks, bonds, and cash - away from bonds.

Rao Chalasani, chief investment strategist for Kemper, says that there are too many uncertainties about the Clinton economic plan to guarantee its total success - and thus, a boost to the bond market.

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