Japanese Gov. Bond Auction Flop. y2k?

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This comes courtesy of J. Orlin Grabbe's page at www.aci.net/kalliste ...

Japanese Financial Markets Japanese Government Bond Auction is a Flop Y2K Bug, or Just Low Interest Rates?

The volume of bids for Japanese government bonds yesterday fell to their lowest level for at least 12 years amid signs that Japan has become the first global debt market to be infected by "millennium bug" concerns.

A regular monthly auction of JGBs attracted only 1.41 bids for every bond offered, sharply down from 1.91 a month ago, and the lowest rate recorded since the 1980s.

Investors' lack of enthusiasm partly reflects the recent improvement in the Japanese economy, and the rising budget deficit. However, it is also the result of concerns about the liquidity of Japanese bond markets in the run-up to December 31.

Investors fear that the main institutions which hold JGBs, such as life assurance companies, Japanese banks and public institutions, will refuse to lend bonds for trading purposes over the year-end period because of the risk that customers' computers will fail.

One senior foreign banker said yesterday: "What we are seeing in Japan is the first time that a bond market has been affected by millennium problems - it is potentially very serious."

Prices in the futures market - or the price of JGB contracts settled in the future - have collapsed this month because of millennium bug concerns.

Because JGB traders rely on being able to buy futures contracts to hedge their current cash purchases of JGB issues, some foreign investors were reluctant to buy bonds at yesterday's auction.

William Campbell, head of fixed-income research at JP Morgan, said: "Without a hedging tool, it is unsurprising that demand at the government auctions falls off."

Some US banks are now appealing to the Japanese authorities to restore liquidity by encouraging public and private institutions to continue lending bonds over the year-end period.

The Japanese government insists that it is taking necessary precautions to avert any millennium bug problems.

The Bank of Japan and Ministry of Finance have so far refused to make any statement, partly because they hope that the distortion is simply a temporary phenomenon.

The problem of the millennium bug has arisen in Japan earlier than in other capital markets, partly because the Tokyo Stock Exchange announced earlier this year that it planned to implement a technical reform of the futures markets from next March.

As a result, traders are reluctant to use the September and December contracts. When the first March contract became available in the markets this month, many investors rushed to buy this instead.

The fact that investors already hold a contract that will be settled in 2000 has brought forward concerns about liquidity.

The Financial Times, August 25, 1999

-- Drew (Kolosky@Prodigy.net), August 25, 1999

Answers

Now we've seen financial "problems" in Europe and Japan start to develop.

Uncertainty kills markets.

We live in interesting times.

-- nothere nothere (notherethere@hotmail.com), August 25, 1999.


This definitely what you would call a clue. Lemme see if I have this straight. The Japanese insurance agencies will likely hold their large positions in cash (JGB) bonds rather than allow them to be used for trade. They may be doing this in response to a "budget" but more likely it is Y2K related fear. They will hold their cash bonds which will effectively take a LOT of coin out of the loop. The futures markets for these bonds are now reflecting this as well as the blatherings of the Japanese government Miyazawa et al. As I said before, the Games Have Begun. (Incidentally, Also, was rather surprised to see the funds selling crude through the floor today. The SOLD SOLD SOLD. A big old Duh! for them.)

And I quote:

A MOF (Ministry of Finance) source told Reuters that the ministry is prepared to change government bond issuing procedures if uncertainty over the millennium bug keeps reducing liquidity in the bond market.

99/08/24 RTR JGBs down on jitters over supply, extra budget 99/08/24 RTR JGB futures end down as supply fears unabated 99/08/24 RTR JGBs slightly lower amid jitters over supply 99/08/24 RTR JGBs easier, MITI's business index fails to excite 99/08/24 RTR JGBs down at midday, shrug off MITI business data 99/08/24 RTR JGBs lower due to poor demand for new 10-year bond 99/08/24 RTR JGBs seen on defensive,focus on MITI business data 99/08/24 RTR FOCUS-Japan economy optimism boosts 10yr JGB yield 99/08/23 RTR JGBs lower after poor demand for new 10-yr bond 99/08/23 RTR RTV - LIVE DATA - 10-YEAR JGB AUCTION - ON AIR AT 0529 99/08/23 RTR JGBs extend loss on wariness about auction results 99/08/23 RTR JGBs down at midday on subdued interest in auction 99/08/23 RTR JGBs ease in mid-morning Tokyo ahead of auction 99/08/23 RTR JGBs easier, bank interest in new issue seen low 99/08/23 RTR JGBs seen trapped as no strong bid seen in auction 99/08/23 RTR JGBs end Tokyo easier on pre-auction wariness 99/08/22 RTR JGBs weaker by late Tokyo ahead of 10-yr auction 99/08/22 RTR EURO DEBT- Prices start weaker amid JGB losses 99/08/22 RTR JGBs weaker in Tokyo, wary ahead of auction 99/08/22 RTR JGBs barely lower on Nikkei rise, Miyazawa comment 99/08/22 RTR JGBs dip on Nikkei rise, strong yen lends support 99/08/22 RTR JGBs slip in early Tokyo after solid Nikkei gains 99/08/22 RTR JGBs down in early Tokyo, pressured by Nikkei rise 99/08/22 RTR JGBs seen rangebound ahead of 10-yr auction, FOMC 99/08/19 RTR March JGBs extend gains, underpinned by cash bonds 99/08/19 RTR JGBs end higher supported by BOJ outright buying 99/08/19 RTR March JGBs keep firm footing, supported by cash 99/08/19 RTR JGBs up by midday Tokyo with focus on stronger yen 99/08/19 RTR JGBs up as cash bonds firm, eye yen strength 99/08/19 RTR JGBs pare early losses stemming from Nikkei rise 99/08/19 RTR JGBs seen weighed down, focus on moves in Nikkei 99/08/19 RTR JGBs higher on stronger yen, but uptrend stalls 99/08/18 RTR JGBs up but off highs as Nikkei rebounds at close 99/08/18 RTR JGB futures extend gains, buoyed by yen strength 99/08/18 RTR JGB futures up nearly one point on Nikkei, yen 99/08/18 RTR March JGBs up sharply on Nikkei slide, yen rise 99/08/18 RTR JGBs up as Nikkei edges down, but top seen limited 99/08/18 RTR JGBs edge higher as Nikkei falls, but top limited 99/08/18 RTR JGBs to carry LIFFE rise but limited on auction 99/08/18 RTR SIMEX Euroyen futures rise on steady JGBs 99/08/17 RTR March JGBs maintain strength, but still fragile 99/08/17 RTR March JGBs keep firm tone, but trend still fragile 99/08/17 RTR JGBs extend gains as Nikkei retraces from highs 99/08/17 RTR Mar JGB futures up but weighed on supply concerns 99/08/17 RTR JGBs higher but gains sapped by supply concerns 99/08/17 RTR JGBs up in Tokyo but Nikkei rise limits gains 99/08/17 RTR JGBs edge up but strong Tokyo stocks limit gains 99/08/17 RTR JGBs seen opening higher in Tokyo, upside limited 99/08/16 RTR JGBs mostly retrace losses but sentiment bearish 99/08/16 RTR March JGB futures recoup losses but sentiment weak 99/08/16 RTR March JGB futures extend losses on large-lot sales 99/08/16 RTR JGBs remain bearish, investors cool to cash bonds 99/08/16 RTR JGBs keep bearish tone as supply concerns persist 99/08/16 RTR March JGBs edge down after early upside test fails 99/08/16 RTR JGBs dip after opening firmer, supply fears linger 99/08/16 RTR March JGBs seen keeping weak tone, focus on Nikkei 99/08/16 RTR SIMEX Euroyen slips as Nikkei rallies, JGBs weaker 99/08/16 RTR JGBs tumble, pressured by supply worries, Nikkei 99/08/15 RTR JGBs off sharply in Tokyo on supply outlook,Nikkei 99/08/15 RTR JGBs stay weak, hurt by supply concerns, Nikkei 99/08/15 RTR Dlr falls vs yen after rise in Nikkei, JGB yields 99/08/15 RTR Dlr slides vs yen on Nikkei rally, JGB yield rise 99/08/15 RTR March JGBs slide after Obuchi fans supply concerns 99/08/15 RTR March JGBs off sharply at midday on supply outlook 99/08/15 RTR Dlr down vs yen after rises in Nikkei, JGB yield 99/08/15 RTR March JGB futures fall on supply concerns, Nikkei 99/08/15 RTR March JGB futures tumble on supply concerns,Nikkei 99/08/15 RTR JGBs seen weighed down in Tokyo on supply concerns

TOKYO, Aug 25 (Reuters) - Japanese government bond (JGB) prices were lower in late Tokyo on Wednesday, weighed down by worries over upcoming JGB auctions and uncertainty over the size of a supplementary budget. But JGBs found some support as new 2.0 percent government-guaranteed and municipal bonds fetched active investor buying, traders said. The key March 10-year JGB futures contract ended down 0.28 at 127.90. "Strong demand for new government-guaranteed bonds and municipal bonds showed that investors are keen to buy bonds with coupons of two percent or higher," said a trader at a trust bank. "So the 10-year JGB yield could find near-term resistance at around two percent," he added. The yield of the September 215th 10-year JGB, auctioned on Tuesday, was at 2.0 percent at 0630 GMT, up from 1.995 percent late on Tuesday. "After seeing very poor 10-year JGB auction results yesterday, people are worried about the upcoming auctions, especially next week's six-year JGB offering," said a dealer at a Japanese brokerage. The Ministry of Finance's (MOF) auction of 1.4 trillion yen worth of 1.9 percent 10-year JGBs on Tuesday produced a bid-to-cover ratio of 1.41, down sharply from 1.91 in the previous 10-year auction. Lacklustre auction results were mainly attributed to uncertainty over the size of a possible extra budget, which Tokyo said will be decided after the release of data on Japan's gross domestic product (GDP) for April-June, due around September 10. The market was now bracing for an economic stimulus package . A MOF source told Reuters that the ministry is prepared to change government bond issuing procedures if uncertainty over the millennium bug keeps reducing liquidity in the bond market. worth 10 trillion yen with a public works component of around five trillion yen, which were the numbers floated by Economic Planning Agency Minister Taichi Sakaiya earlier this month. But some traders said the low level of bidding also reflected investors' reservations about using JGB futures for hedging amid fears that the availability of cash bonds in the repo market could become more scarce in the coming months. This was because major holders of cheapest-to-deliver cash bonds for the key March contract, such as life insurers, might become more reluctant to lend cash bonds due to millennium risks The MOF is scheduled to auction two-year JGBs on Thursday, and six-year and 30-year JGBs next week. "Two-year auctions should go well, as investors see limited risks in the short-end of the yield curve," said the trust bank trader. "But six-year auctions won't go smoothly, as more supply is expected over the coming months in the medium-term zone, such as the planned issuance of five-year corporate bonds by major Japanese banks this autumn," the trader said. Japan's Ministry of International Trade and Industry (MITI) said earlier on Wednesday that its overall business activity index fell 0.1 percent in June, compared with market expectations for a 0.4 percent decline. But the data failed to significantly move the market as analysts said it was not strong enough to improve their predictions for April-June GDP. ((Kanta Watanabe, Tokyo Treasury Desk +81-3 3432 9780 tokyo.newsroom@reuters.com))



-- Gordon (g_gecko_69@hotmail.com), August 25, 1999.


This smells an awful lot like a liquidity crisis brewing out there. Any traders care to comment on this? This could be a big old "bang" for world markets if the probs. are not solved.

Wednesday August 25, 6:09 am Eastern Time MOF not eyeing JGB sales if postal savings fall TOKYO, Aug 25 (Reuters) - The Ministry of Finance (MOF) is not currently planning to sell to the market Japanese government bonds (JGBs) it holds if there is a sharp fall in postal savings system (Yucho) deposits, a MOF official said on Wednesday. The MOF said in a statement that the Trust Fund Bureau will take appropriate measures to cope with the possible reduction in Yucho's deposits because they are a major fund source.

``At the current point, the Trust Fund Bureau is not considering selling JGBs held by the bureau,'' the statement said.

Earlier on Wednesday, an official at the Ministry of Posts and Telecommunications said it expects a net outflow of 31 trillion yen worth of deposits from Yucho in fiscal 2000/01 and 2001/02 combined.

A senior MOF official told a new conference: ``The Trust Fund Bureau will mull various measures to cope with the outflow of Yucho's deposits.''

The official said the MOF will coordinate closely with the Bank of Japan (BOJ) to cope with the possible reduction in Yucho's deposits.

Asked about the BOJ's position on the expected fund outflow, the official said it was expected to take appropriate steps to maintain stability in the market.

Asked if there would be a change in the Trust Fund Bureau's outright JGB purchasing operations, he said: ``Our policy on money market operations has not changed. We will continue to watch trends in the market to make our decisions.''

The bureau currently purchases about 200 billion yen worth of JGBs outright from the money market each month. On the effect on the JGB market, he said: "It's difficult to predict the impact on the JGB market, but we will take appropriate measures against any negative impact.

---------------------------------------------------------------------- ----------

-- Gordon (g_gecko_69@hotmail.com), August 25, 1999.


10-Year JGB - Contract Specifications Symbol - J

Name - 10-Year JGB

Exchange - LIFFE

Trading Months - H,M,U,Z (the U and Z here stand for Sep and Dec)

Trading Unit - % 100,000,000 face value notional long term Japanese government bond with 6% coupon

Trading Hours - 7:00a.m. - 4:00p.m. on APT

Tick Size - % 0.01 - (% 10,000 per contract)

Daily Limit - Y 1.00 from Tokyo Stock Exchange's closing price. If limit is hit, price limits are removed one hour later for the remainder of the day. There is no limit during last hour of trading on each day.

Last Trading Day - One business day prior to Tokyo Stock Exchange last trading day ------------------------------------------------------------------- I put these specs here so that you get some idea of the size of the $$$$ we're talking about here. Wake up out there, no one stepped up for JU or JZ. No one thinks they'll be liquid. WHAT DOES THAT TELL YOU???????

-- Jim Smith (cyberax@ix.netcom.com), August 25, 1999.


For educational and research purposes only:

August 25, 1999

---------------------------------------------------------------------- ----------

Japan MOF: To Monitor Impact Of Postal Saving Redemptions

TOKYO -- Japan's Finance Ministry said Wednesday that it will monitor the impact from an expected flood of redemptions of time deposits in the nation's postal savings system.

A large part of those deposits will mature in the years 2000 and 2001, but "the outlook for whether money will be left in the savings system after the redemption period depends on various factors, such as interest rate levels and the attitude of depositors," the ministry said.

One factor could be the partial retraction from April 2001 of the safety net guaranteeing bank deposits, the ministry said.

The ministry said the effect of the massive redemption will vary depending on how much money flows out of the system and how much flows back into the scheme.

In a statement, the ministry suggested, however, that the effect could be limited whatever happens, as the overall amount of money in Japan's financial market wouldn't change.

The ministry said it will work to cope with any market impact from postal savings redemptions, while keeping in close contact with the Bank of Japan.

As for the effects on the government's fiscal investment and loan program, or FILP, in the fiscal year starting in March 2000, the ministry said it would be necessary to review the current program should money channeled from the postal savings system decrease, as the system is a major source of funds for the program.

"But we cannot provide any figures for FILP in the fiscal year 2000, as we don't know how much money will be available," a senior aide at the finance ministry's trust fund bureau, which manages the funds, said.

The ministry noted that, at the moment, the trust fund bureau doesn't regard selling its Japanese government bond holdings to the market as an option for obtaining funds.

The aide at the finance ministry's trust fund bureau also reiterated: "As we have kept saying, (the MOF's trust fund bureau) plans to continue buying JGBs."

The bureau currently buys Y200 billion of JGBs outright from the market every month. The bond market plummeted late 1998 when it announced that it would stop outright bond purchases in 1999. It resumed the outright purchases from February to prevent bond yields from soaring.

The aid also said the ministry will continue its efforts to encourage the market to absorb JGBs smoothly.

"MOF will continue watching market conditions and will make efforts to achieve smooth and steady JGB absorption," the MOF aide said.

The ministry said that it is discussing ways to encourage individual investors to buy more JGBs, such as asking post offices to widen over- the-counter sales of bonds.

-- Gordon (g_gecko_69@hotmail.com), August 25, 1999.



Germany may avoid new debt issues around Y2K

-- (another@market.watcher), August 25, 1999.

This is truly nutz. The Germans won't be issuing bonds during that time, but they aren't worried about the impact that might have on liquidity. Hmmm, two of the largest economies in the world concerned about Y2K? There just might be something to all this foofah.

For educational and research purposes only:

Germany may avoid new debt issues around Y2K-sources 09:58 a.m. Aug 25, 1999 Eastern FRANKFURT, Aug 25 (Reuters) - Germany may consider avoiding issuing new debt around the year 2000 change-over to prevent possible hicups related to the millennium bug, market sources said on Wednesday.

Monetary authorities appear unconcerned, however, about possible liquidity shortages in the markets due to the switch.

``The finance ministry and the Bundesbank may want to avoid clustering debt issues around new year's day to alleviate concerns over malfunctioning computers,'' one source said.

``The European Central Bank's liquidity providing facilities should suffice to handle a possibly increased cash demand around year's end,'' a source said.

A spokeswoman for the German finance ministry told Reuters there were no plans to change the policy on issuing government debt to take into account the risk of liquidity squeeze because of the Y2K problem.

Asked about Japan's review of debt issuing procedures to take into account liquidity fears linked to the Y2K, the spokeswoman said: ``We do not share these concerns.''

-- Gordon (g_gecko_69@hotmail.com), August 25, 1999.


Boston Herald

Worries of Year 2000 disruptions spark rash of corporate offerings

The Wall Street Journal Monday, August 23, 1999

Richard J. Almeida, chairman and chief executive officer of Heller Financial, isn't sure if the markets will go haywire as Year 2000 approaches.

But he'd rather be safe than sorry.

So Mr. Almeida's company, a major lender to midsize and smaller companies, has raised $750 million over the past month, capping more than $3 billion raised so far this year, to square away its funding needs before any possible market turmoil related to Y2K.

``It was really anticipating the fact that there could be market disruptions in the fourth quarter,'' Mr. Almeida says. ``Our feeling is there would probably be a lot of adverse psychology, so we should try to anticipate our funding needs early.''

U.S. companies are scurrying to raise money, in part to sock away cash before any market disruptions caused by the Y2K computer bug. Or to be more precise, disruptions caused by fear of the Y2K bug.

Since May 1, $23.8 billion of initial public offerings have been completed, up from $14.7 billion in the same period last year, according to CommScan LLC, in part due to an impetus to go public ahead of potential Year 2000 market problems. Meanwhile, nearly $31 billion of investment-grade corporate bonds were sold last month, up from $17 billion in June and $11 billion in May, according to Credit Suisse First Boston. And $20 billion of bonds have already been sold this month.

Says Geoffrey Coley, co-head of global capital markets at Salomon Smith Barney: ``Y2K has been part of the calculus in virtually every decision by corporate issuers in the last three months.''

It's difficult to distinguish exactly how much of the rush is from Y2K-specific fears, of course. Also driving the capital-raising drive are fears of rising interest rates by the Federal Reserve, concern about a fourth quarter that has been difficult for bond investors for the past two years, and a desire to issue before summer vacation season peaks.

But executives say worries about Y2K troubles are playing a big part in the race to raise funding. Even companies with overflowing coffers are concerned: AT&T raised $3 billion in one-year securities last month, in part to ensure the company will have enough cash on hand at year end, according to people close to AT&T.

``My fear is we're ready for Y2K, but will there be redemptions from mutual funds hurting liquidity in the market?'' asks Thomas Capo, treasurer of DaimlerChrysler, which sold a massive $4.5 billion in bonds last week, the seventh-largest investment-grade bond deal ever. ``There's a huge question of how investors will behave near the end of the year, and as an issuer it's prudent to get the majority of the year's requirements done now.''

Ford Motor is itself ready for Year 2000. But the company was glad to get its record-breaking $8.6 billion bond deal done last month, rather than test the market later this year or early next year, after the start of 2000.

``You never know what will happen and it's not a bad idea to put some money away as a precaution,'' says Dave Cosper, Ford's executive director of corporate finance.

Corporate leaders are more prone to view Y2K as a mass mania fueled by consulting companies and the survivalist industry than as a fundamental threat to society. Few believe the financial system will stop functioning as computer clocks attempt to flip over to Jan. 1, 2000.

But many corporate chiefs and investment bankers fear that investors will shift away from riskier bonds, like corporate and junk bonds, later this year and stick to cash or safe Treasurys. This could handicap companies in need of financing, causing fallout in corporate boardrooms.

``If for some reason something goes wrong and a CEO turns around and says to a treasurer `Hey, where's my funding?' +the treasurert is likely out of a job,'' says Dominic Konstam, senior strategist at First Boston. ``There's little upside for these guys'' in waiting to raise financing later in the year.

Executives may be right in being nervous about the availability of financing ahead of 2000: 58 percent of investors surveyed recently by Merrill Lynch said they plan to build their cash on hand ahead of Y2K, and 29 percent said they plan to increase their holdings of Treasurys. And 87 percent of corporate-bond investors expect ``liquidity'' - or ease of trading without price disruptions - to fall moderately or seriously as Y2K approaches. Moderate or serious liquidity problems are expected by 53 percent of money-market investors.

The move to juggle funding has been notable in the market for commercial paper, the short-term securities sold by companies looking for short-term borrowing. Many corporations don't want to have commercial paper that expires, and needs to be refinanced, near year- end. So they have been replacing shorter-term instruments, which often must be refinanced every seven to 28 days, with securities maturing next year. The result: a surge in the supply of commercial paper, with spreads widening.

At a recent meeting of the Financial Executives Institute, members said ``they're all avoiding settlements from Dec. 30 to Jan 7,'' said Philip B. Livingston, president and chief executive officer of the Morristown, N.J., professional organization. ``They're trying to avoid any kinds of deal closings in that period. It's going to be a dead period in financial markets.''

Even if big money managers stay the course and computer systems stay afloat, individuals are a wild card. Frightened by the end-of-the- world hype that the banking system will collapse, people may decide to go out after Thanksgiving and pull an extra $1,000 in cash out of their money market funds.

-- (another@market.watcher), August 25, 1999.


``You never know what will happen and it's not a bad idea to put some money away as a precaution,'' says Dave Cosper, Ford's executive director of corporate finance.

Sage advice. I suspect most of us here feel the same way!

-- (another@market.watcher), August 25, 1999.


This whole thread looks, walks, quacks, smells, and tastes like a duck, errrrr clue.

The only question is when the rest of the world is going to see the handwriting on the wall.

c

-- Chuck, a night driver (rienzoo@en.com), August 25, 1999.



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