Bond investors nervous about Y2K : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Bond investors nervous about Y2K A new survey shows that investors, increasingly worried that Y2K glitches could affect the cash flow of corporate bonds and other riskier securities, may seek security in government issues and cash.

By Reuters

July 16, 1999 1:48 PM PT

Well before the curtain falls on 1999, a Wall Street survey found that bond investors are concerned about risks related to the so-called Year 2000 bug, prompting them to seek a safe haven in U.S. Treasuries.

Merrill Lynch & Co. Inc.'s "Y2K Fixed Income Investor Survey" polled more than 100 firms and found that uncertainty over cash flow may prompt investors to sell corporate bonds and other riskier securities, while holding government instruments and cash.

Market participants are increasingly worried that unpredictable factors related to the turn of the calendar from 1999 to 2000 could affect the cash flow of certain bond issuers, and thus the liquidity of their bonds. Liquidity -- the ability to buy or sell a security at will -- is a key concern among market participants who expect declines in liqudity to be evident for some securities later this month and continue until early October.

A "moderate or serious drop"

Holders of debt issued by corporations are most concerned about declines in liquidity: 87 percent expect it to fall moderately or seriously. Many holders of corporate debt will seek a safe haven in U.S. government debt.

Even wary countries will get Y2K bug bites

"Uncertainty on this front is a Y2K conundrum: many investors cannot know for sure the amount of withdrawals and therefore have to overestimate," Merrill Lynch said.

The Wall Street firm found that "most investors face at least some cash flow uncertainty -- 64 percent said they were not very certain about their ability to predict cash flows." Also, 55 percent of investors involved in the asset-backed and mortgage-backed debt securities markets said they expect a moderate or serious drop in liquidity.

Active cash flows raise biggest fears

Merrill Lynch found that markets with an active exchange of cash flow -- money markets and mortgage-backeds as well as asset-backeds -- are the most concerned about bonds with debt service payments around year-end.

"To date, liquidity has been good for securities with late-December and early-January debt service payments. However 32 percent of those surveyed are concerned about owning these types of securities," according to Merrill Lynch.

Corporate debt investors, the survey found, are checking closely for firms that are Y2K compliant. Investors said spreads on debt issued by noncompliant issuers should widen in the fourth quarter. Over half of those polled expected corporate debt spreads to U.S. Treasuries to widen by more than 10 basis points.

Seventy percent of all investors expect liquidity to fall at least moderately. Investors appear to expect supply and demand distortions to occur in tandem.

"Issuance will likely be moved forward, just as investors begin to build their holdings of liquid assets. Almost two-thirds responded that they expect at least a moderate curtailment in Q4 supply," Merrill Lynch said.


-- Gayla (, July 18, 1999


Thank you, Gayla. Nice to see you posting again.

-- Dave W (, July 18, 1999.

Since stocks, more often than not, follow bonds...and if the market begins dropping this early, will people panic this early???

-- Mara Wayne (, July 18, 1999.

Rumor has it that the big buyers of short term, (credit card) debt are going to sit out Oct's auction because of Y2K concerns. This would put the sqeeze on the credit card companies and merchants wouldn't get paid. Could be the prick which pops the bubble!

-- Ralph Kramden (, July 19, 1999.

Thanks, Dave! It seems there are several posters on this forum whose only intent is disruption. I would hate for new people to come here and find only that.

-- Gayla (, July 19, 1999.

No matter how hard the disrupters hit your post, ignore them. They will go away. I now look at the handle and don't even read the post if it is a disrupter.

North has commented on this article on his site today. Bottomline: Buy now people.

-- BB (, July 19, 1999.

Thanks Gayla, although I have to say this doesn't inspire a feeling of security; not that I felt secure anyway. Someone said, "Security is just a bubble in search of a pin."

-- gilda (, July 19, 1999.

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