A Treasury bill that matures the first week of January fetched significantly more than one that matures just a week earlier.
This is just one of the anomalies popping up in financial markets as fears take hold about potential problems when computers turn over their internal dates to 2000.
Taking note of these signals, money managers, underwriters, strategists and analysts are re-evaluating their positions and trying to anticipate how investors and others will react to the possibility of computer glitches at the end of the year.
"It is not a made-for-TV disaster with a meteorite hitting the U.S.," said Neil Soss, chief U.S. economist at Credit Suisse First Boston. "But it is big."
After all, investing is all about the trade-off between reward and risk.
And investors have determined that it is worth paying a little more to avoid year 2000 risk. In the first week of July, the government auctioned the first six-month Treasury bills that will mature in the new millennium. Investors paid considerably more for them than for comparable bills that will mature at the end of 1999. So the government was able to issue the new bills at a 4.58 percent rate (the yield moves in the opposite direction of the price), down a third of a percentage point from the rate at auction a week earlier on six-month bills that mature Dec. 30.
More remarkable, the newer six-month bills carried the same rate as simultaneously issued three-month bills, though people customarily expect a higher return for locking up their money longer. The reason: Many investors apparently do not want to be cashed out of investments in the final days of the year because they might have few options.
Anticipated events are often priced into the market before the events themselves occur. But the long lead-up and the uncertainty about the effect of Y2K has made specific dislocations nearly impossible to predict.
The core concern is that investors worried about computer disruptions will look for the safest place for their money: the Treasury market. If this flight to safety happens, liquidity, a measure of how easy it is to trade large amounts of securities without distorted price moves will disappear in much of the rest of the fixed-income market. That happened in fall during the global financial crisis. Losses mounted for owners of many securities considered more risky than Treasuries, and trading these securities all but halted.
Complicating the picture are the contradictory needs of investors, companies and money managers. Some need to have cash on hand near the end of the year, while others do not want to be caught with cash to invest in an uncertain climate. Still others have to get loans that carry their businesses over the turn of the year.
Because no one knows what the market environment will be like in November and December, many decisions about buying and selling that would otherwise be made at the end of the year are being moved into the third quarter, just to play it safe.
Companies that issue commercial paper, asset-backed securities and bonds want to sell early to be sure they find buyers. As much as $20-billion could be added to the normal sales of asset-backed securities in the third quarter, predicts Paul Jablansky, head of research in this sector at Salomon Smith Barney, a unit of Citigroup.
The Bond Market Association, which represents the fixed-income industry, has advised its members to curtail the issuance of short-term debt securities that mature at the end of December and the beginning of next year.
So money managers are buying early to make sure they get enough to satisfy their needs. David Sylvester, who runs the Stagecoach and Norwest Advantage money market funds for Wells Capital Management, began planning for his year-end mix of securities and cash in May instead of October, when he normally would. He wants to be sure that he can meet withdrawals if investors decide they want extra dollars around the first of the year. He now has about 8 percent of his funds invested in commercial paper that will mature and be ready cash in December and the first two weeks of January. Normally, it would be just 1 percent to 2 percent of his portfolios.
The unusually strong demand has sent up the price _ and depressed the yield _ on commercial paper maturing early in 2000 compared with commercial paper maturing later in the new year.
Outside the fixed-income market, analysts are trying to anticipate which stocks could be vulnerable. Computer fears could cause investors to sell smaller company stocks and move into the Standard & Poor's index of 500 stocks that are considered a better haven, though there is no sign of such activity yet.
Still, stock mutual funds are recalculating their exposure. Money managers at T. Rowe Price are reviewing year 2000 compliance efforts of all the companies whose shares are held in their stock mutual funds. So far, they have examined about 500 American companies, said Steven Norwitz, a vice president. Of those, he said 15 to 20 had been "flagged" and put on a watch list because of year 2000 concerns. Of those, he said, "a handful" had been sold.
Wall Street analysts suggest investors might shun some utility stocks for fear that some companies will experience service disruptions, cutting into profits. Kevin McCarthy of Donaldson, Lufkin & Jenrette expects a decline in spending on information technology later this year will reduce earnings at personal computer and hardware companies, pushing profits below consensus forecasts.
Year-end fears also could make it harder for investors to short, or bet on declining prices of stocks or bonds. A short seller borrows a stock or bond and sells it hoping to buy it back later a lower price. If the price falls, he returns the stock or bond to the lender and pockets the difference between his selling price and buying price as profit. Because detailed computer records are needed for those transactions, the big lenders of securities might curtail their business near the end of the year, some industry analysts suggest.
Investors and money managers are expected to be especially wary of securities so complex that much computer power is required to create, price and trade them. This category includes many derivatives, which are securities whose performance is based on the performance of an underlying security, like a stock, bond or currency. Also on the list are many mortgage-backed securities, which are bundles of mortgages, and asset-backed securities, which can be bundles of credit card or other loans, that are packaged and sold to the investing public.
In recommendations to market participants, the Bond Market Association notes that year 2000 issues are magnified in the mortgage-backed and asset-backed securities markets "because of the extent to which data processing and computer-to-computer system communication is essential to effectuate securitization, trading, confirmation and timely payment of principal and interest."
Along with complex securities, foreign securities could be a target of fear. Because even if computer problems at the turn of the year proved to be minimal in the United States, the perception is that they will be worse in the rest of the world.
"Whether there is a rational basis to it or not, no one will want to hold big risk positions in emerging markets in the fourth quarter," said Desmond Lachman, the director of emerging markets research at Salomon Smith Barney. The question, he said, is whether money managers will sell well before the fourth quarter in anticipation.
Making money on all these market swings ought to be easy if you believe that the fears are exaggerated. Just buy mortgage-backed securities when they are being shunned and profit when year 2000 fears diminish and they rally.
Ken Hackel, head of mortgage-backed and asset-backed research at Merrill Lynch, predicts that "by the end of the third quarter and early in the fourth quarter, people will realize this is a buying opportunity." But, he said, "the risk-taking mentality is pretty subdued right now."
The options market, in which speculators can make big bets, is a logical place for gambling. "It is not easy to say that the option market is looking for a tremendous event," said Eric Gould, the over-the-counter Treasury options trader at Credit Suisse First Boston. "But it is not easy to say it isn't. It will be easier to say one way or the other on Dec. 1."
Money managers also seem reluctant to take on risk. N. Graham Allen, the managing director of global fixed-income at Wells Capital Management, said he probably will not stray far from the index his performance is compared with. If something goes wrong, his return will at least be no worse than his benchmark.
In an effort to limit the fallout from Y2K fears, federal regulators advise institutions to be prepared to meet unusual demands for cash near the end of the year. The Federal Reserve also has set up a special unit to make loans to banks from Nov. 1 through April 7. The loans will help assure that banks have the resources, the Fed said, "to confidently commit to supplying loans to other financial institutions and businesses through the rollover to the new century." The Fed also is increasing its available currency by $50-billion.
Strategists and analysts say these initiatives have helped calm market participants. But the unusual steps have put more pressure on the normal order and pace of financial practices at the end of the year.
Thomas Galvin, chief investment officer at Donaldson, Lufkin & Jenrette, says his approach is to get investors to look beyond Jan. 1 into 2000. "After it is over, despite the dawn of a new millennium, our daily lives will be much the same and so will investing principles," he wrote in a new year 2000 analysis. "We can't view this as the end of the investment horizon."
But he admits to having trouble winning this argument right now.
Edward Yardeni, the chief economist at Deutsche Bank Securities who has forecast that a recession will be triggered by year 2000 behavior, said financial markets are prepared for a moderate year 2000 disruption, but no more.
"If even a plausible worst case scenario plays out, that is not in the market," he said.