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The unwinding of swaps and futures led to massive movements in the over-the-counter interest-rate derivatives market last week, as some hedge funds and proprietary desks sold in advance of the end of the month when many, particularly in the U.S., close their books for the year. The activity led to substantial moves in all swap spreads. For example, in the U.S., the more liquid two-year spreads widened to 3.8% from 3.52% last Tuesday, a huge move when compared to the daily average of roughly seven basis points, according to traders and strategists. A relatively benign week of U.S. economic figures also contributed, leading punters to speculate interest rates may start to raise early next year.

Madison, Wis.-based Alliant Energy recently hedged a portion of its weather risk for the winter by buying a heating-degree-day put on the average temperature in Madison from November through March, said Bill Zorr, general manager of gas trading. In the transaction, Alliant will receive a payout from Hess Energy Trading Co. if the temperature is warmer than the 10-year average in Wisconsin. Zorr declined to specify the exact sum the company will receive, but said it was enough capital to cover the lost revenue the company would have received if it sold gas to customers during a cold winter. If the winter is colder than the 10-year average then the deal expires out-of-the-money.

Global Asset Management (GAM) plans to add to its holdings of French, German and Italian sovereigns. Ron Tabbouche, London-based portfolio manager, says it will wait for European government bonds to bottom out before making the move. Once the yield on U.S. Treasury five-year paper reaches 5.25% and German five-year paper is at about 5%, the firm will put some of the cash in its $250 million global bond portfolio to work. Last Tuesday, the German five-year note was yielding 4.25% and the U.S. five-year yielded 4.33%. He declined to specify exactly how much would be rotated into the sector. GAM will seek to add longer-dated paper, anywhere from five years and up, because he says short-term interest rates will continue to decline, and that, coupled with inflation, should lead to curve flattening.

Traders who can usually explain the front, back and side of a deal fell silent when asked about the bank debt for Enron Corporation, currently the most notorious--and most confusing--credit in the market. When asked how much of the deal is secured and unsecured, a trader replied with a laugh, "If you can figure it out, you should become a credit officer." Another just waved the white flag of resignation. "It's too complicated for my simplified mind," he said.

The Bank of Oklahoma Financial Corporation, the Tulsa-based holding company that includes the Bank's funds from Oklahoma and several other states, is seeking to pick up additional yield by adding $300-400 million in 2.5- to three-year planned amortization class and sequential commercial mortgage obligations. Lee Allen, manager of $3 billion in taxable fixed-income, says the holding company would sell one-year CMOs to finance the purchase. Before he invests, Allen wants to see five-year Treasury yields drop to 4.10% or 4.15%: last Thursday, five-year yields were 4.21%. He says such a move would suggest economic weakness as well as the stabilization of five-year rates, and convince him that the Federal Reserve will remove its easing bias on short-term interest rates. Allen says the holding company would probably add 6% coupons to guard against prepayments. However, he would consider 6.5% coupons, if the unemployment rate tapered off at 5.5% and retail sales numbers showed strength.

Sage Advisory Services is swapping 15%, or $75 million, of its $500 million portfolio, out of agency debentures into spread product, specifically corporates and mortgage-backed securities. Bob Smith, portfolio manager at the Austin, Texas-based firm, says the agency debentures are being sold because the firm believes interest rates have bottomed out, diminishing the benefits attached to owning positive convexity. Smith will seek to sell straight non-callable, or bullet, Fannie Mae and Freddie Mac bonds in the five- to seven-year sector. The firm has already begun the move.

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.

ABN AMRO Asset Management is looking into purchasing and selling credit derivatives next year to tailor its exposure to specific credits for its EUR850 million (USD749 million) European corporate bond fund. An official in Amsterdam said the fund, which holds about 150 investment-grade credits, has been in discussions with Merrill Lynch to determine whether it makes sense to use single-name default swaps. ABN uses a Merrill index for the fund, which is why it is talking to the dealer and not its in-house bank. However, it would be open to talking to other potential counterparties as well, according to the official. The asset management company would use default swaps to gain or reduce exposure to specific credits at specific maturities, which is currently difficult in what he called the relatively sparse European cash bond market.

TPG, the privately owned Dutch mail carrier with approximately EUR7.5 billion (USD6.6 billion) in assets, is examining using credit derivatives for the first time to hedge its counterparty credit risk. Lars Wickson, assistant treasurer in Amsterdam, said the company is keeping abreast of events in the credit derivatives market as a possible means to supplement other risk management techniques. The company already uses plain-vanilla derivatives, both listed and over-the-counter to offload interest-rate and foreign exchange risk. He said the company works with roughly 15 relationship banks and picks counterparties on the basis of price and credit rating. He declined to name the firms.

The Japanese government and major Japanese banks, such as the Bank of Tokyo-Mitsubishi and Sumitomo Mitsui Banking Corp., saw their credit ratings downgraded by Fitch Monday, prompting a flurry of trades in the credit-default swap market. "Things are absolutely crazy," said Ralph Orciuoli, managing director of structured credit products at Bank of America in Tokyo, noting that volumes on the sovereign surged to around USD100 million per day early last week from USD30-50 million in a typical week. Spreads on 10-year protection on the sovereign jumped from 27-32 basis points to 33-37bps last Wednesday, he noted.