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The cost of U.S. dollar/Japanese yen options inched higher last week and the greenback gained on the yen, as investors speculated that the Bank of Japan's intended reforms will lead to a medium-term weakening of the yen. One-month implied volatility rose to 10.7% Wednesday in New York, up from 10.2% earlier in the week. The move was in line with a stronger dollar. The pair traded at JPY123.20 by Wednesday, up from JPY122 Monday.

Deutsche Asset Management, which manages E16 billion in fixed-income assets from its Zurich office, is biding its time until swap spreads on government bonds and pfandbriefe widen before adding to its covered bond positions. Sven Rump, portfolio manager, says swap spreads are tight because of supply and demand, making government bonds relatively cheap versus covered bonds. Governments will be issuing more bonds in the coming months, and for the time being there is no premium to be paid on government bonds. Once spreads widen, he plans to move between 10-15% of the portfolio, or at least E1.6 billion, into covered bonds. Currently, the spread between 10-year government paper and pfandbriefe is 26 basis points. Rump says he will buy when spreads are 50 basis points.

In a bid to pick up yield, Brandywine Asset Management is moving 7% of its assets, or $175 million, into select corporate credits that have been hit hard by recent negative headlines. Stephen Smith, executive v.p. and portfolio manager overseeing $2.5 billion in taxable fixed-income, says firm is looking at credits trading at a significant discount relative to their historical prices and to where they would trade in a normal economic environment. Names the firm is looking at include Household International, CIT Group, Verizon Communications and Electronic Data Systems. The firm is selling 30-year French and Italian sovereign debt and using paydowns from inverse floating-rate mortgage-backed securities to finance the purchases. Smith says he expects the move to be completed within the next week or two, as Brandywine is already in the market looking for bonds.

The latest round of gallows humor features an email saying that JPMorgan is cutting 120% of its workforce. The gag email, making the rounds in the market, says that after the bank lays off all of its staff, it will cut an additional 20% through external reductions cutting staffers at rival banks. Firms picked by JPM as "External Reduction Targets," or ERTs, include Goldman Sachs, UBS Warburg, Citigroup and Credit Suisse First Boston.

The Deal Roll-off Chart, provided by Capital DATA Loanware, lists the 50 largest leveraged credit facilities in the U.S. market that are due to mature in the coming month. It is designed to provide a look at potentially available money in the market as credits are renewed or retired.

This chart, provided by Citibank/Salomon Smith Barney Inc., tracks bid-ask prices for par credit facilities that trade in the secondary market. It also tracks facility amounts, ratings, pricing and maturities.

Debbie Cervantes, portfolio manager at Patterson & Associates, says her firm will add agency notes and Treasuries to its portfolio, using $85 million in cash or 10% of the total fund to finance the purchases. The move will be made as soon as the stock market and the economy recover. Two likely indications that the economy is recovering, she says, would be a stabilization of the unemployment rate and some market anticipation that the Federal Reserve will shift to a tightening bias. She declined to predict when she sees the market evolving in that direction. She says that the firm has kept the overall portfolio duration short, at six months. Because, with rates at an all-time low, there is more yield pickup on the shorter-end of the curve and no real incentive to give up liquidity. As an example, six-month commercial paper, which last Monday yielded 1.80%, offers 25 basis points additional spread over Treasuries than comparable agency notes. This is due partly to the fact that the yield curve is inverted, which diminishes the incentive of extending duration, she notes. She reasons that once the Fed tightens, the yield curve will take a positive slope, making the purchase of one- to two-year agency notes and Treasuries more affordable.

JPMorgan, Goldman Sachs and UBS Warburg have started aggressively marketing equity variance swaps--instruments that allow investors to gain exposure to changes in volatility--and some are pushing new versions as demand rockets on the back of high volatility. European equity volatility has spiked as high as 50% in recent weeks, which is higher than levels seen after Sept. 11, traders said. JPMorgan has seen a six-fold increase in demand for variance swaps in recent months and is now selling about 30 transactions a month, according to a firm official.

Traders are examining their counterparty risk to JPMorgan in light of a recent downgrade and a statement that the bulge bracket will post weaker than expected earnings. Although the firm is still rated AA minus traders said they are reviewing their collateral agreements with an eye to reducing risk, either by shrinking credit lines or buying credit protection. Eileen Darko, spokeswoman in London, declined comment.

KEB Commerz Investment Trust Management, a Seoul-based asset manager with USD2.1 billion under management, is examining using over-the-counter equity options for an upcoming fund. Jae Hyun Lee, head of equities in Seoul, said that once the fund is up-and-running it will look at the possibility of using OTC puts and calls in addition to exchange-traded options and futures. He expects the fund to launch in the coming weeks, but declined further comment.

Nomura International and Credit Suisse First Boston have agreed to a provisional court date early next year for their dispute over whether exchangeable bonds are deliverable in a USD10 million Railtrack credit-default swap. For the complete claim form in PDF format, click here.