Flatsville,
How about Barron's?
"professional investors are preparing to protect themselves and perhaps even profit from some sort of financial catastrophe as the new millinium draws"
Today's Barrons: Y2K fear affecting market.
Rate Spike Ahead?
Market action shows rising fear about Year 2000
computer snafu
By William Pesek Jr.
You've no doubt heard the horror stories that could begin at the stroke of
midnight on December 31 next year: Unable to cope with the year 2000,
computer programs go kerplooey, causing airplane crashes, recession and
perhaps the accidental launching of a nuclear bomb. Now we must add to
these hysterical scenarios the possibility of a disaster on Wall Street, one
that would trigger a breakdown in the international financial system,
boosting interest rates, reducing investors' access to their money and
disrupting payments between businesses and banks. This may sound like
an X-Files episode or an Oliver Stone film, but the fact is that in recent
weeks trades have been executed on the Chicago Mercantile Exchange that
indicate professional investors are preparing to protect themselves, and
perhaps even profit, from some sort of financial catastrophe that would
strike as the new millennium dawns.
Appropriately enough, the maneuvers at the Chicago Merc are called
Millennium Trades. In essence, the folks behind these trades hope to profit
on the possibility of a sharp upward swing in interest rates late next year.
To accomplish this, traders are selling two interest-rate futures contracts
dated December 1999 and buying one contract dated September 1999 and
one dated March 2000. By selling the December contracts, the millennium
traders will profit if interest rates spike between December 16, 1999, and
March 16, 2000. Likewise, by selling the other two contracts, the traders
benefit if rates turn out to be lower than expected for the three months
leading up to December 16, 1999, and the three months following March
16, 2000.
For now, it appears that the millennium trades are occurring only on
futures contracts related to short-term interest rates, but the action could
spread to longer-term rates before long. Alex Manzara of Commerz
Futures warns that the millennium-trade action at the Chicago Merc
could presage an unprecedented level of uncertainty for banks.
Late last week, the futures indicate that for time periods covered by
the December 1999 contract, short-term interest rates would be 5.19%, a surprising
spread above the 4.79% rate indicated for the
September period. About six weeks ago, the December contract was indicating a
short-term rate of 4.83%, just a bit above the rate
suggested by the September contract. Clearly, worries have mounted since then.
Another unusual signal is coming from the March 2000 contract, which
late last week was indicating a short-term interest rate of 4.87%, well below
the 5.19% indicated by the December 1999 contract. Having the March rate
below the December rate is unusual, and it shows that investors are
concerned that some atypical event will push interest rates up at yearend
1999.
And remember, rates could shoot upward even if no year-2000
catastrophe materializes. The mere fear of a meltdown could be enough to
increase rates. With worries about a catastrophe in the air, you can expect
that lenders will be demanding a significant premium to lend short-term
funds in the waning days of 1999. There's also the alarming thought that
higher-risk borrowers will be shut out of the credit markets completely at
that time.
In a perfect world, the Y2K issue would a problem. But the world right
now is far from perfect. With economies fragile in emerging countries and
Europe adopting a single currency, the stakes are particularly high. "Here
is yet another land mine that Alan Greenspan will have to cope with,"
Manzara says.
James Bianco of Bianco Research notes that in the past two weeks the
millennium strategy has begun to be employed overseas. Indeed, largely
because of Y2K concerns, the three-month euroyen contract is signaling
higher interest rates for late next year. Short-term rates in Germany and
the United Kingdom have been affected as well.
Market watchers like Bianco have long suspected that as more and more
investors understand the risks of the year 2000, worries about the
millennium bug will heighten. "This may be the beginning," he says.
Where is the next place Y2K worries will surface? Perhaps the U.S.
Treasury market. Notes and bonds that mature near December 31 of next
year could be vulnerable, for obvious reasons. Another area of risk could
be notes and bonds that mature on June 30 or December 31 of any year
because they pay a semiannual coupon on December 31, 1999. Holders of
these securities who want to re-invest their funds would have to enter into
a trade that settles over the millennium, or wait until Monday, January 3,
2000, and attempt to trade then.
Some trading desks plan to avoid carrying positions at yearend. And U.S.
financial firms have been bombarded with questionnaires and surveys
about Y2K compliance from organizations like the National Association of
Securities Dealers. These inquiries have raised awareness, but also
probably contributed to the uncertainty. Central banks are certainly
gearing up for any surprises. The Federal Reserve plans to have an extra
$50 billion on hand at the turn of the century to deal with any unexpected
surge in demand for money. The Bank of England announced it may
print an additional $33 billion worth of pounds for the same reason.
Says Dana Saporta, Fed-watcher at Stone & McCarthy Research
Associates, "It looks like the central banks are looking ahead to the end of
the century, and that's comforting."
True, but right now it's impossible to precisely predict how fears of Year
2000 disasters will affect market trends on Wall Street or consumer trends
on Main Street.
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