European corporates have capitalized on a sharp rise in interest rate swap rates and implied volatility in recent weeks by executing a flurry of swaps and options, while others have rushed to lock in hedges against further rate spikes. These trades have caused volumes to rocket by 25-50%. French retailers Casino Guichard-Perrachon and Carrefour have reportedly piled into the swap mart to convert a portion of existing debt into fixed, while the jump in implied vol has caused others, including Imperial Tobacco, to look for opportunistic ways to earn premium. Traders said future activity would depend on the direction of swaps rates. Mathieu Guillo, an official in the funding group at Casino in Sainte-Etienne, France, and Pierre Mainoldi, official in the treasury group at Carrefour in Paris, declined comment.
Short-dated swaption implied volatility climbed to 185 basis points last week from 130bps three weeks ago. The 10-year swap rate rose to 4.45% last week from 4.00% two weeks earlier. "It's the biggest move I've ever seen in two weeks," said one swaps trader. Rates backed up so substantially because the market believed that the war in Iraq was going to be quick and investors began shifting out of bonds and into equities at a breakneck pace, said an analyst.
Ed Eisler, head of European interest rate trading at Goldman Sachs in London, said he has seen an increase in inquiries from European corporates to enter swaps. A trader in London said transactions going through the dealer market averaged EUR100-500 million (USD107.37-536.83 million). "Corporates are doing these trades because they panicked as rates backed up," he said.
The U.K.'s Imperial Tobacco is taking an opportunistic approach and selling short-dated options to take advantage of high levels of implied volatility. The company has some 85% of its EUR4.69 billion in euro-denominated debt in fixed-rate and plans to eventually convert more of its floating-rate debt into fixed, said Rachel Fisher, assistant group treasurer in Bristol, U.K. The trades are three-year swaps in which the company is paying floating and receiving fixed with an option that gives the counterparty the right to call the trades every three-months. Fisher said the company has executed two of these trades with a total notional size of EUR70 million.
Fisher explained it has been able to put on these positions without worrying about the implications of International Accounting Standard 39 because they are likely to expire before the company is required to mark derivatives positions to market under the new regulation.
Stephen Jones, head of European corporate derivatives marketing at Barclays Capital in London, said trades similar to Imperial Tobacco's strategy are popular right now because of high volatility.
