Tiggy,
FYI:
US hedge funds: Investors bet on banking paralysis
MONDAY MARCH 16 1998
By Simon Davies Capital Markets Editor
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US hedge funds have taken substantial bets in the financial markets that the millennium bomb will paralyse the banking system on January 1 2000, forcing interest rates higher.
Futures brokers said there had been heavy selling of December 1999 futures contracts in US and German interest rates, in a financial transaction nicknamed the millennium fly. A trader in New York said more than $5bn of contracts had been sold.
These investors believe that computer problems will cause
significant financial disruption, driving up bond
short-term interest rates. This would substantially reduce
the value of any interest rate contracts that straddle the
beginning of 2000.
The millennium bomb has arisen because many computers will
be unable to recognise the year 2000. This could disable
programs after midnight on December 31 1999. So far, the
millennium bomb has had a limited impact on financial
markets. It has driven up the price of some information
technology stocks, owing to consultancy fees that could
come from sorting out computing problems.
The millennium fly is a so-called butterfly spread, where
the investor sells December 1999 contracts, and buys
September 1999 and March 2000 contracts. This would be
highly profitable if short-term interest rates rise
sharply between December 1999 and March 2000, when the
3-month interest rate agreement expires. The activity has
all been concentrated in Eurodollar and Euromark
contracts, which are based on US and German interest
rates. However, brokers suggested that investors might
take positions in bond futures also.
One trader said: "In December 1999, money could become
very expensive. People will be out partying for the
millennium, computers could be breaking down, and so there
could be a scramble for cash. This would be made worse if
the bomb has a broader economic impact."
Other investors suggested that the hedge funds were
scare-mongering in the hope of making a very short-term
profit.
Thomas Juterbock, head of US and European government bond
trading at Morgan Stanley, said: "It is very hard to
discount events that far out. Besides, the market probably
hasn't thought enough about what the Central Bank response
to this will be, which will be to provide liquidity in a
time of uncertainty."
He said that there would probably be an additional bank
holiday over the millennium period, providing more time to
resolve any difficulties.
c Copyright the Financial Times Limited 1998 |
