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Conning Asset Management is buying mortgage-backed bonds, both pass-throughs and collateralized mortgage obligations, on the view that credit deterioration and a historically steep yield curve will continue to help the sector outperform. Karen Kelleher, portfolio manager who oversees $1 billion in the firms $30 billion fixed-income portfolio, says the firm has moved away from investment-grade corporates (the firm's traditional asset of choice) and purchased Fannie Mae and Freddie Mac pass-throughs in the 6-6.5% sector of the coupon stack. She has also been buying 10-year original life PAC CMOs, backed by conventional 6-6.5% collateral, believing that the negatively convex structure will protect from extension risk. The moves have been financed with cash from MBS that prepays, as well as from the sales of shorter average life CMOs. Kelleher says she might purchase an additional $40 million or so of MBS, should the curve stay in this range, bringing the firm roughly in line with the MBS weighting of the Lehman Brothers aggregate index.

As volatility has increased since Sept.11, Jim Cusser, portfolio manager with Waddell & Reed Investment, has been buying negative convexity bonds, such as callable agencies and pass-through mortgages, on the assumption that volatility will pull back to more normal levels. Cusser says he has been buying $20 million in callable agencies and $30 million in mortgage-backed passthroughs for the past two weeks, representing a 7%, or $49 million, of its portfolio. He says he has done most of his move, although he may add an additional 1.5-2.0%, or $10-20 million more. The move was financed using new cash inflows.

Early this month Dutch officials said that a man had bought two bags of fish food with a euro banknote three months before the official introduction of single currency notes and coins. According to Reuters, the shopkeeper who accepted the money was quoted as saying he knew the note was not legal tender but accepted it because he thought it was "fun." Talk about a free-for-all.

David Killian, portfolio manager with Stone Ridge Investment Partners, says his firm will reallocate 8%, or $14 million of its portfolio, out of Treasuries into both mortgage-backed securities and corporates as soon as he sees evidence of an economic rebound. He anticipates that the move will be done early next year, triggered by jobless claims leveling off, a slight pick-up in manufacturing orders and a rise in consumer confidence.

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.

Bank of America has hired three fixed income and credit derivatives pros and plans to add up to five more to beef up its commitments in Japan as part of a restructuring effort. Growing client demand for fixed-income and credit products, such as structured notes and synthetic collateralized debt obligations, has prompted the move, according to Kenichi Tatsuzawa, managing director and head of the global markets group in Tokyo-which runs all fixed-income related products. Before the department was structured along product lines with nobody taking direct responsibility for Asia. The firm has implemented the change to better co-ordinate the products in the region as the department grows.

CDC Ixis has launched an over-the-counter equity derivatives desk in New York. CDC started trading at the beginning of the month under the direction of Richard Suth, head trader, who joined from CIBC World Markets about three months ago. Suth said the desk is part of CDC's push to capture a piece of the burgeoning U.S. equity derivatives market.

Bear Stearns International is planning to grow its London-based interest-rate product group by nearly 50% in the coming months as part of the firm's ambition to become a larger player in the European market, according to George Polychronopoulos, senior managing director. Polychronopoulos, who will lead the effort, joined last month from Deutsche Bank, where he was most recently head of marketing to Scandinavia and Greece (DW, 10/1). Previously he had been head of Scandinavian and Greek interest-rate products. At Bear Stearns, his position is parallel to that of Jérôme Camblain, who runs the sales side.

Volumes in the London credit derivatives market slumped last week as traders turned their attention away from making prices and instead focused on settling contracts on Railtrack and Swissair. Overall volumes for the asset class were roughly 25-30% lower than an average week, according to traders. "There's been a noticeable decline because participants are settling contracts and thus doing less business," said Tim Frost, head of European credit derivatives at J.P. Morgan in London. He said the decline indicates a "lack of infrastructure" as the credit derivatives market continues to grow. "Most people are spending a lot of their time this week on Railtrack," noted another trader.

Indianapolis-based Great Lakes Chemical Corp., a producer of specialty chemicals for flame retardant devises, such as fire extinguishers, is considering tapping the interest-rate derivatives market for its first foray into any type of derivatives product. John Kunz, treasurer, said the company's decision to begin eyeing interest-rate swaps has been prompted by a continued flattening of the U.S. Treasury yield curve.

Deutsche Bank is recommending clients purchase one-year at-the-money U.S. dollar calls/yen puts to take advantage of low volatilities caused by the Bank of Japan's intervention to create a dollar floor around JPY119 and the belief in a U.S. recovery next year, said Ken Landon, senior currency strategist at Deutsche Bank in Tokyo. "It's a pretty straightforward strategy-a lot of people like that," he added, "anyone who wants to take a directional view would be interested."