Pre-2000 funding crush fueling swap spread blowout : LUSENET : TimeBomb 2000 (Y2000) : One Thread


Pre-2000 funding crush fueling swap spread blowout 10:12 a.m. Aug 06, 1999 Eastern By Christina Fincher

LONDON, Aug 6 (Reuters) - An expected rush by Eurobond borrowers to raise funds ahead of an expected Y2K-related year-end market shutdown is fuelling the sharp spike in swap spreads seen this week, bond analysts said on Friday.

Early year-end book-closing is likely to result in a condensed second half trading period, sending borrowers scrambling to satisfy funding needs in a two- rather than four-month trading period, they said.

Swap spreads, which reflect the interest rate premium a double-A rated borrower has to pay over government bonds, are a key barometer of credit risk in the financial markets.

``We are still expecting a significant new issues pipeline in September/October time,'' said one bond originator.

``Y2K issues mean many investors will be closing their books early and borrowers needing to raise funds will have little option but to join the funding crush.''

Heavy expected corporate bond supply going foward is adding to pressure on swap spreads, which have spiralled higher recently as fears of higher interest rates in the United States have ignited liquidity concerns.

Benchmark 10-year dollar swap spreads soared to 114 basis points this week, their widest levels in a decade while other major currency swaps hit levels not seen since Russia's debt crisis last September.

But analysts note important differences between the credit crunch of last autumn and the latest bout of swap spread widening.

``Last year, two major credit events -- the near-collapse of Long Term Capital Management and Russia's debt crisis -- blew spreads wider,'' said Edward Marrinan, head of European credit research at J.P. Morgan.

``To date, there have been no credit concerns on this magnitude and swap spreads are drifting wider largely on liquidity rather than credit concerns.''

Last Autumn, panic-stricken investors dumped corporate bonds for the safety of government bonds, but flight-to-quality flows so far have been relatively low.

Instead of grinding to a halt, the Eurobond market has seen a host of corporate borrowers raising funds in recent days.

On Thursday, as U.S. swap spreads hit decade-highs, retail giant Wal-Mart priced a $5.75 billion bond -- the fourth largest bond in U.S. corporate history -- to finance its acquisition of British supermarket chain Asda.

Even sub investment-grade borrowers such as the Republic Turkey and Hillsdown unit Premier International Foods have been able to access the market in recent days.

But fears of even wider swap spreads and higher borrowing costs going forward may be one reason to explain the recent issuance rush, analysts said.

J.P. Morgan analysts predict that a combination of higher interest rates and flatter yield curves will lead to swap spreads widening a further six to 10 basis points before the end of the year.

((London Capital Markets +44 171 542 7748 fax +44 171 542 5285))

-- (M@rket.watching), August 06, 1999



WORLD BONDS-Caution calls as spreads signal gloom 09:04 a.m. Aug 06, 1999 Eastern By Aline van Duyn

LONDON, Aug 6 (Reuters) - A sharp spike up in credit yield premiums could signal impending financial turmoil and strategists said on Friday a move into liquid government bonds was advisable even though prices there might also fall.

In the last two weeks, U.S. swap spreads have soared to their highest levels in a decade. But wider spreads have been seen in other dollar sectors as well as in major markets in Europe and Asia.

U.S. swap spreads, which reflect the interest rate premium a double-A- rated borrower would have to pay over U.S. Treasuries, have now exceeded the peaks seen during last year's global financial turmoil.

This move could cloud the U.S. monetary policy outlook, as rate hikes aimed at controlling inflation could crash the credit markets, analysts said.

``The spread widening shares some of the characteristics we saw last fall, and markets are beginning to anticipate a similar round of financial turbulence,'' said Adam Beaudin, international bond market strategist at Credit Suisse First Boston in Zurich.

``Markets are distorted by high rate expectations which are generally not well founded, and mainly by fears that markets will be illiquid for months. We would favour government bonds over anything credit related,'' he said.

Ten-year U.S. swap spreads, a benchmark measure of appetite for credit risk in the international markets, reached peaks around 114 basis points on Thursday, their highest in a decade.

At the height of last year's financial crisis in mid-October, triggered by an Asian currency crisis and a Russian debt default, 10- year swap spreads stood at 95 basis points.

The environment is very different now from 1998.

The push to wider spreads is not worries about mass defaults or a slowdown in growth, but a combination of factors like reduced liquidity, particularly related to year 2000 switchover problems, and jitters about U.S. stocks and the dollar.

``Liquidity is down across all markets with leveraged and bank proprietary accounts playing a diminished role,'' said strategists at Warburg Dillon Read.

``Less quantifiable, but indisputably present, is the growing Y2K risk aversion and all this at a time of heavy corporate bond issuance and falling expectations for government supply. None of these factors will disappear over the next few weeks.''

The sharp moves in swap spreads have triggered talk of big losses by banks in recent days, but so far this has not come to anything more substantial.

Last year, the collapse of major hedge funds added further fuel to credit concerns and was a big impetus for spread moves.

David Munves, credit strategist at Lehman Brothers in London, said the absence of such credit problem made the current yield levels a buying opportunity.

``Either the market is real smart and forecasting something we don't think will happen or it's got ahead of itself,'' he said. ``We think it's the latter.''

``The spread widening is due to the extreme specialness of the U.S. curve, in 10-years this has added 30 b.p. to swap spreads. This partly reflects decreased volume of Treasury issuance and the increased corporate issuance.''

The U.S. Treasury's announcement this week that it would buy back bonds from next year added to this trend.

He said Lehman was still recommending remaining overweight in corporate bonds, in light of the historically high spreads offered at the moment.

What the spread moves do mean is a trickier situation for the U.S. Federal Reserve, which hiked rates in June and needs to decide whether inflation will become a problem or if it is cooled enough.

``For policy, expect the credit story to be a key feature of the August 24 Federal Open Market Committee meeting,'' Warburg Dillon Read analysts said.

``Though focused on growing inflation pressures, a return of investor disengagement with the bond markets would be too high a penalty for making a tightening mistake,'' they said.

((London Capital Markets, +44 171 542 6176, fax +44 171 542 5285,

-- (M@rket.watching), August 06, 1999.


"``Last year, two major credit events -- the near-collapse of Long Term Capital Management and Russia's debt crisis -- blew spreads wider,'' said Edward Marrinan, head of European credit research at J.P. Morgan. "

As if there isn't another LTCM waiting in the wings. The Russian stock market has taken a BIG hit in the past couple of weeks.

The "Plunge Protection Team" will be overwhelmed this time around.


-- Ray (, August 06, 1999.

I was going to post the following as a separate thread but it confirms the above statements.

Le Metropole members,

We have just received word from a reliable source that the renowned hedge fund, Tiger, is in deep, deep trouble and in even worse shape that we have been reporting to you.

The latest news is they are about to be hit with a $6 billion dollar redemption. At best, that will mean their capital base will have dropped from $22 billion to $6 billion - and perhaps it could be lower. In addition we have been told that 50% the staff has left.

If true, and our source is impeccable, it can explain why the swamp spreads are at such high levels - which indicates that there is tremendous stress in the credit system.

It explains why there is do much talk ( even in the Wall Street Journal ) about Goldman Sachs, Chase and other banks having some big problems.

Today, the bank index is tanking and is down 2% at the moment. The index broke 800 and is down 16 points on the day. It expains why financial stocks are reeling.

This new revelation most likely means what we have been telling you about the emergency Fed meeting, the hush hush banking meeting in Philadelphia, and the borrowing hundreds of tonnes of gold by Tiger and its bankers is also most likely all true.

It also can explain the strange Bank of England sale. I will have more this later, but there was a front page story in the Guardian in London today that nows says the Bank of England Governor, has contradicted himself about the sale.

And the Bank of England did not deny it.

Friday August 6 - London- Reuters:

"A spokesman for the Bank of England had no immediate comment, other than to say the story CONTRADICTED PUBLIC STATEMENTS by George in evidence to the committee on May 25."

Any of most importance to us, it can further explain the mainipulation of the gold market and it makes a mockery out of the British and American governments. This is collusion and conspiracy at its finest.

It can explain why the price of gold will not rise when all the news is bullish for gold. Today, the the stats in the U.S employment report were very inflationary as 100,000 more new jobs were created than expected and average hourly earnings were much higher than expected as they rose $.06.

But gold never rises on bullish news. It can't rise because Peter Fisher of N.Y. Fed and his "Hannibal Lechter" bullion bankers are sitting all over the gold market in "cabal" fashion.

This is an outrage of the the highest order and is surely going to bring on one of the great financial scandals in American history.

Why do you think Bank of England Governor is running away from the BOE sale and not denying the kind of story that came out in the Guardian this morning?

Stay tuned. Much more to come

All the best,

Bill Murphy Le Patron

-- Bill P (, August 06, 1999.

Ray, as you said yesterday, even when the market was up earlier today (now down 130), losers outnumbered gainers 2-1. Care to guess what stocks the PPT is gobbling up? :)

-- a (a@a.a), August 06, 1999.

Ray said----"plunge protection Team"


We should all take note their was such a team in the 1929 debacle. Wonder who the team is made up of today? It definately looks as if they are in play!

-- David Butts (, August 06, 1999.

Moderation questions? read the FAQ