BLOOMBERG: Y2K May Drive Investors to U.S. Bonds: Rates of Return
By Wes Goodman
Sun, 27 Jun 1999, 2:51pm EDT
(Repeats story from June 25, adds detail in 15th paragraph.)
New York, June 26 (Bloomberg) -- The Year 2000 computer
glitch could be a boon for Treasury securities.
U.S. government debt may lure investors looking for a safe
place to park their money before year end in the event computers
overseas read the year 2000 as 1900 and shut down, hurting
financial markets and economies.
Banks in many countries are ''manifestly under-prepared''
for the Y2K computer problem, the Basel Committee on Banking
Supervision warned in March. The group sets regulatory
guidelines that are widely followed by major industrial nations.
In the U.S., by contrast, tests showed computers at more
than 400 brokerages, stock exchanges and asset managers are
ready to handle stock, bond and mutual fund trades at year end
without a hitch, according to a study last month by the
Securities Industry Association, a trade association.
''If you have money in a part of the world that is not as
prepared for Y2K as the U.S., Treasuries will be as good as it
gets'' in providing a haven, said Colin Lundgren, who helps
invest $8 billion of bonds for American Express Asset Management
in Minneapolis.
Lundgren predicts Y2K buying will drive the 30-year
Treasury yield down a quarter percentage point as 1999 closes
from 6.15 percent today. Though he's favoring mortgage-backed
and corporate bonds now, Lundgren said Y2K will make Treasuries
more attractive in the last months of the year.
Worldwide Slowdown?
Most industrial economies are well prepared for Y2K, said
William McDonough, president of the Federal Reserve Bank of New
York. ''It'll be a little more spotty among the emerging market
countries,'' he said. ''Some of them are in great shape. Others,
less so.''
Y2K holds another benefit for bonds because it may slow
economic growth, helping keep inflation in check. Bond investors
fret over rising inflation because it erodes the value of their
fixed interest payments.
There is a 70 percent chance that Y2K will cause a
worldwide recession, said Ed Yardeni, chief economist at
Deutsche Bank Securities.
''The year 2000 problem is a very serious threat,'' he
said. He pointed to Brazil and countries in Asia, where currency
devaluations in the last few years roiled international
financial markets.
Russia, short of revenue after defaulting in August on its
domestic debt and some foreign obligations, in February warned
its defense and aviation industries aren't prepared for possible
computer breakdowns on Jan. 1. The government said it can't
guarantee it will be able to avert blackouts, heat shortages and
communications failures.
Fed Rates
Y2K might keep the Fed from raising U.S. interest rates
late in the year, even if the booming economy doesn't slow down.
''There will be a constraint on the Fed,'' said William
Dudley, chief U.S. economist at Goldman, Sachs & Co. ''As we get
into the fourth quarter, Y2K will keep the Fed on the
sidelines.''
To be sure, Fed policy-makers are expected to raise rates
Wednesday, at the end of a two-day meeting to cool growth and
head off future inflation, analysts say.
Euro-dollar interest-rate futures contracts that settle in
December suggest investors expect U.S. money-market rates to
rise by as much as 60 basis points by year-end.
The Fed may even make more money available to ensure
transactions run smoothly at year end. It is considering a plan
to ease rules on loans to banks that in turn lend money to
companies to deal with Y2K computer problems.
''The Fed is going to keep an open mind and an open
pocketbook,'' said Ned Riley, chief investment officer at
BankBoston Corp. in Boston, which oversees $30 billion.
Easy to Trade
Treasuries also stand to gain because they are plentiful,
which makes them easier to trade. Investors flocked to 30-year
bonds last year as economies slowed worldwide and losses of more
than $4 billion at Long-Term Capital Management LP, a hedge
fund, threatened the health of financial institutions.
At the time, traders refused to do business and parts of
the debt market froze up until the Fed solved the problem by
cutting interest rates three times, last September, October and
November. Investors buying Treasuries sent the benchmark yield
to a 31-year low of 4.69 percent in October. That rally pushed
bonds up 18.5 percent last year, including price gains and
reinvested interest payments, the best showing since 1995.
Since then, dealers have been trimming holdings of
securities that aren't so easily traded. Merrill Lynch & Co.,
the biggest U.S. securities firm, owned $35.4 billion in
corporate bonds and preferred stock in September 1997. That
position was cut to $20.7 billion as of March.
Investors don't expect another bond rally like the one in
October, though the demand for securities that are easy to trade
will grow as Y2K approaches.
''People are taking the opportunity to get into liquid
bonds so they don't have a repeat'' of being stuck with bonds
they can't sell,'' said Mark MacQueen, a manager of the $450
million portfolio at Sage Advisory Services Ltd. in Austin,
Texas. ''People will seek out Treasuries.''
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