Reserve Bank of Australia Bulletin
January 2000
The Impact of Y2K on Financial
Markets in Australia
Effects on Short-term
Interest Rates
As in other countries, financial markets in
Australia were affected in 1999 by the
so-called ‘Y2K’ problem – that is the
uncertainty as to whether computer systems
would recognise the century date change. The
effects on financial markets were due to banks
and other market participants taking steps to
arrange their balance sheets and operations
to limit the impact on their businesses of any
serious computer malfunction.
Although the direct impact on financial
markets of flows associated with Y2K was
likely to be concentrated around the end of
1999 itself, markets began to anticipate the
possible effects as early as a year ahead.
Generally, these pressures were most evident
in the pattern of short-term interest rates.
Concerns about the capacity of financial
markets to handle pressures at the end of 1999
first became apparent towards the end of 1998
in the pattern of yields on bank bill futures
contracts, with expected yields on securities
maturing over year-end being higher than
those on surrounding maturities (Graph 1).
This pattern later extended into yields on
physical securities and continued through the
second half of 1999 (Graph 2). Markets
consistently expected that short-term interest
rates would be higher, on average, in the
Graph 1
Graph 2
Interest Rate Expectations
Interest Rate Expectations
Bank bills
Bank bill futures contracts
%
Y2K
5.75
%
%
5.75
6.00
%
Y2K
6.00
Nov 99
5.75
5.50
5.50
Jun 99
5.25
5.75
Oct 99
5.50
5.50
5.25
5.25
Mar 99
5.00
5.25
Sep 99
5.00
5.00
Dec 98
4.75
4.75
4.50
4.50
Sep 99
Dec 99
Mar 00
5.00
Aug 99
4.75
4.75
4.50
December 99
January 00
4.50
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January 2000
The Impact of Y2K on Financial Markets in Australia
30 days from mid December to mid January
than in the periods immediately before or
after.1 This reflected the fact that borrowers
were keen to issue securities maturing early
in the new year, in order to secure funding
over year-end, while lenders were reluctant
to commit to investments over that period.
A similar pattern in yields – in most cases
even more pronounced – was evident in all
major countries. This can be seen in Graph 3,
which plots the evolution of the Y2K ‘spike’
in major countries, calculated as the margin
by which yields for the 30-day period spanning
year-end exceeded those for the preceding and
subsequent 30-day periods.
Graph 4
Australian Short-term Interest Rates
%
%
6.0
6.0
90-day bill
yield
5.5
5.5
5.0
5.0
30-day bill
yield
4.5
4.0
4.5
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4.0
Graph 5
Graph 3
Short-term Interest Rates
Y2K Spike
90 days
Bps
Bps
%
150
6
%
US
150
6
Euro area
US
100
100
5
50
4
UK
5
UK
Canada
Japan
50
4
Euro area
0
Australia
l
-50
Aug
l
Sep
0
3
-50
2
3
NZ
l
Oct
1999
l
Nov
Dec
This pattern meant that, as year-end
approached and short-term securities began
to have maturities spanning year-end, their
yields began to rise. Yields on 90-day
securities, for example, rose noticeably in early
October as these securities began to span the
turn of the year. This can be seen in the case
of Australia in Graph 4 and in the case of some
other countries in Graph 5. Yields on 30-day
securities, on the other hand, rose in
December when their maturity also began to
span the turn of the year. At the very end of
December, yields on all short-term securities
fell sharply as markets became convinced that
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Y2K pressures would be handled comfortably
and concerns about the quality of bank risk
receded. These lower levels of bill yields were
sustained into January.
Yields on short-term government securities
rose by much less than those on bank bills
through the closing months of 1999, largely
reflecting the greater liquidity of short-term
government securities. While the Reserve
Bank had announced that it would, if
necessary, accept bank-issued securities to
help manage liquidity flows around year-end,
there was greater certainty about the liquidity
of CGS, as the Bank would continue to accept
1. While this ‘spike’ clearly reflected Y2K concerns, the tendency for the level of expected interest rates to rise in the
second half of 1999 reflected market expectations about monetary policy.
2
Reserve Bank of Australia Bulletin
January 2000
them as a matter of routine. As a result, the
margin between yields on Treasury notes and
bank bills widened noticeably, from about
20 basis points on 90-day securities in
mid 1999, to 80 basis points in late December
(Graph 6). As the year turned uneventfully,
the premium investors attached to the liquidity
of government securities declined. In early
January, the margin between bill yields and
Treasury note yields fell towards the more
normal levels of mid 1999. Again, a similar
pattern was apparent around the world.
trends in currency holdings earlier in 1999,
the Reserve Bank had forecast that the
‘normal’ rise in notes on issue (holdings by
the public plus currency held in banks’ vaults)
between mid November and Christmas would
be about $2.2 billion; other things equal, the
Bank forecast that this would be reduced to
about $1.7 billion by end December, with the
remainder of the pre-Christmas rise being
reversed in January.
Graph 6
Banks’ Cumulative Currency Purchases
Graph 7
From mid November
$b
$b
4
4
3
3
Bank Bill Yield Less Treasury Note Yield
90 days
Bps
Bps
75
75
60
60
45
45
30
30
15
15
2
2
1998
1
1
1997
0
0
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Households’ Holdings of
Currency
A major concern relating to Y2K was that
households might withdraw much more
money from financial institutions than they
usually would at this time of the year. This
reflected public concern about disruptions to
automated teller machines (ATMs) and other
electronic payments mechanisms; however,
fears about financial institutions losing records
of deposits were limited.The public’s holdings
of currency always rise strongly at Christmas
time; notes then flow back to the Reserve Bank
in late December and early January (Graph 7).
Taking account of the buoyant economy and
-1
16
24
Nov
2
10
20
Dec
30
7
0
17
Jan
25
-1
While the public’s behaviour in response to
concerns about Y2K could not be predicted
with any confidence, polling on behalf of the
Reserve Bank suggested the likelihood of some
significant additional demand for currency at
year-end. When the polling first started, it
pointed to additional demand of $6–7 billion,
but this estimate gradually fell to around
$4 billion in subsequent polling.
In the event, banks’ purchases of notes from
the Reserve Bank were significantly larger than
could be explained by the normal seasonal
pattern but smaller than was suggested by the
polling. Banks’ cumulative (net) purchases of
notes from the Reserve Bank between mid
November and end December were about
$4.2 billion (Graph 8). Taking account of the
Bank’s forecast seasonal rise (and the fact that
this peaked on the first working day after
Christmas), the banks’ additional demand for
currency notes due to Y2K was about
$2.5 billion, or about 10 per cent of the
3
The Impact of Y2K on Financial Markets in Australia
Graph 8
Banks’ Cumulative Currency Purchases
From mid November 1999
$b
$b
4
4
Actual
3
3
2
2
1
1
‘Normal’
forecast
0
16
4
24
Nov
2
10
20
30
Dec
7
17
25
Jan
0
January 2000
normal stock of notes on issue. This included
not only currency purchased to meet customer
withdrawals but that required for a
precautionary build-up in banks’ vault cash.
While at this stage final figures are not
available, it appears that most of the
$4.2 billion of the currency purchased by
banks remained with them. These purchases
of currency were quickly unwound in January.
By early in the second week of that month,
more than half these purchases had been
returned. R