Tuesday September 7 12:45 PM ET

Muni Bond Issuers Seen Avoiding Dec. Sales For Y2K

NEW YORK (Reuters) - December could be a lean month for new municipal bond deals as municipalities avoid the market because of fears about Year 2000 computer problems, J.P. Morgan Securities Inc. said in a new report.

``Anecdotal evidence suggests that many municipal issuers are being advised by their financial advisors and underwriters, to the extent practical, to avoid issuing debt near year end,'' the report said.

The phenomenon has already appeared in the corporate market, where supply has surged in recent months in part because issuers are hoping to avoid market disruptions at the end of the year.

J.P. Morgan said muni issuers would most likely avoid settlement dates near the end of December and the beginning of January. Because the average time between issuance and settlement is three weeks, many issuers will not be selling much debt in December, moving up their deals to November.

A jump in issuance would ``presumably cheapen the market'' as broker dealers resist large inventory balances, J.P. Morgan said.

The potential for computer-related trouble, which could occur if computers programmed to read only the last two digits of the year mistake 2000 for 1900, increases the risk of greater credit spread volatility moving into January. If any material events do occur, the bonds associated with those issuers will likely experience less liquidity.

``To minimize this downside risk, investors should consider upgrading credit quality moving into year end,'' the report advised.

Greater liquidity risk near the end of the year may also impact bond funds. Current surveys of the U.S. population suggest that investors will be accumulating cash and not investing near year end. And the possibility exists that part of those higher cash balances will come from mutual fund withdrawals, J.P. Morgan said.

======================================= End

Ray

-- Ray (ray@totacc.com), September 07, 1999

Answers

``To minimize this downside risk, investors should consider upgrading credit quality moving into year end,'' the report advised.

Ahh, that seems to explain something that's been bugging me.

I talked with a friend last week who is a portfolio manager and we got into a discussion about the municipal bond market. He told me that his company's bond traders were having a very difficult time obtaining AAA rated municipal bonds. I thought that was a little odd, since prices on Muni's had dropped pretty significantly over the last few months (rates up). That didn't make a lot of sense, since you'd think that if supplies were tight, that prices would be rising (rates dropping).

Seems to be, that within that segment of the market there is a flight to quality from lower rated to higher rated bonds, although overall, there is still strong selling pressure within the Muni bond market - probably a flight to US bonds or short term treasuries.

There is evidence of this (flight out of Muni's into Treasuries) in the spread between Municipal and US Govt. yields getting very tight - something I've been watching for a while. (You can see this if you check out the "Selected interest rates" section in Investor's Daily in the charts they show).

Just an observation. I think it's neat to follow this stuff. It's just a little more confirmation of what's really going on. The greater fool theory is in full force here. Those that are "in the know" are making their moves.

Thanks for the post, Ray.

-- Clyde (clydeblalock@hotmail.com), September 07, 1999.

Thanks Clyde,

The sad thing is that I'm sure the big guys on wall street will have a lot of their money parked before the rollover (if they haven't already).

The 'small guys' (US) have been sold this 'buy and hold' strategy and conditioned to hold stocks instead of sell them in declining markets. I think this will be the undoing of a lot of peoples retirements.

Bryce

-- Bryce (bryce@seanet.com), September 08, 1999.

Clyde,

You wrote: "There is evidence of this (flight out of Muni's into Treasuries) in the spread between Municipal and US Govt. yields getting very tight - something I've been watching for a while. (You can see this if you check out the "Selected interest rates" section in Investor's Daily in the charts they show)."

Are the spreads tightening or widening? If they are tightening, I would take that as a movement into munis from somewhere, rather than movement from munis to treasuries.

Jerry

-- Jerry B (skeptic76@erols.com), September 08, 1999.