Financial Times (London) - 8/16 Comment & Analysis : LUSENET : TimeBomb 2000 (Y2000) : One Thread

[For research/educational purposes only]:

PERSONAL VIEW - JAMES GRANT [the author is editor of Grant's Interest Rate Observer --]

"Joined at the hip"

Bond traders are displaying more signs of worry about the state of the US economy than equity investors, but sooner or later credit concerns will affect share prices

American financial markets are only selectively fretful at the moment. Oddly enough, it is the senior portion of the nation's capital structure that is suffering what looks like a nervous breakdown... Is everyone fully and equally informed?


In the bond markets, all eyes are trained on corporate bond yields, which have risen faster than government ones. At the narrowest levels of 1999, the yield on the Merril Lynch index of 10-year investment grade corporate bonds was 112 basis points -- hundredths of a percentage point -- higher than the yield on the 10-year Treasury bond. Late last week, the difference between the two yields was 136 basis points. Today's creditor is demanding to be paid for taking risk.

The most alarming sign of deterioration in the US dollar interest rate markets is the widening of swap spreads. They are now higher than they were in the 1998 crisis. In case you do not trade bonds for a living, what is exchange in a swap is a strream of interest income. One party to the transaction receives a fixed rate of interest, the other a floating rate.

In the current fraught environment, many more people want to receive floating rate payments than fixed rates, and this preference has been duly reflected in the price of fixed-rate obligations. Those have been falling -- in other words, the market's estimate of the future level of interest rates has been rising.

What do these disturbing trends mean? Possibly only that corporate treasurers are trhing to meet their borrowing needs before freezing darkness settles over the earth at the year 2000. Or that an ageing business expansion is producing a little heat -- a time-honoured cyclical event to which the Fed is responding in time-honoured, belated fashion. Or that -- as rumour has it -- the last holdings of Long Term Capital Management are being put up for sale, creating a final speculative aftershock.

Whatever the reason, the bond market -- by and large a professional's market -- is clearly worried about something. The stock market, which is increasingly the public's market, seems not to be...


* * *

Had to share this. Almost fell out of my chair when I read the sentence about "possibly only... freezing darkness... at year 2000." Grant ends the article in somewhat cryptic fasion:

The credit markets are having their troubles. But on the anniversary of the credit debacle that shook the world, at least everybody knows it. The watched pot never boils over. Watch, instead, the boiling market.

By everyone, I assume he means "everyone important" (aka The Pros).

-- M.C. Hicks (, August 16, 1999


Here's an example of someone who knows something who is biting his tongue while letting a little something slip--that is, the freezing darkness comment. It's the way I speak and/or write. I know what I know. A little edges out, but mostly I try to supress it for mainstream consumption...

-- Mara Wayne (, August 16, 1999.

he's a nerds nerd...[that's a compliment!]

[have watched him numerous times on Wall Street Week; ]

tremendous mind and ability to integrate widely diverse thoughts and events into one coherent concept; checks his premises before he arrives at conclusions; not afraid to be contrary when being contrary is honest;

I listen when James Grant speaks

-- Perry Arnett (, August 16, 1999.

"tremendous mind and ability to integrate widely diverse thoughts and events into one coherent concept; checks his premises before he arrives at conclusions..."

...and, like most of us, unable to predict since 1996 the extent to which the "madness of crowds" could go in our own lifetimes. But then, what responsible investment advisor would have offered clients the advice to ride a wave of such mathematical absurdity had s/he even thought it likely?

-- jor-el (jor-el@krypton.uni), August 17, 1999.

Moderation questions? read the FAQ