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Convertible bonds are corporate bonds which pay the holder regular coupons and may be converted into the underlying shares at the holder's discretion. Here we focus on their exposure to the credit of the issuer. At low equity prices, when the equity optionality is worth little, the convertible is essentially a pure bond and it is clearly correct to price (i.e. discount cash flows) with the full credit spread of the issuer. However, it is generally held that a company's ability to issue stock is not strongly influenced by its credit rating. Accordingly, the value contributed to the bond by its conversion rights should not be subject to the same risky discounting as the fixed payments.

Tullett & Tokyo Liberty plans to expand its recently launched credit derivatives brokerage desk in Singapore in the coming months, said John Rabey, manager of the Asia-Pacific credit derivatives desk. The firm will likely double headcount on the desk to six if volumes continue to grow. Tullett brokers protection on Asian credits, including Japanese and Australian names, from the Singapore desk. Credit default swap trading makes up 99% of the desk's business, he added.

Life imitating art...A firm that produces fake money for American film studios has been ordered to hand over its phoney cash after people successfully spent it. The U.S. Secret Service, which enforces anti-forgery laws, ordered Independent Studio Services to stop printing the notes and get back all the ones it had produced so that they could be destroyed. The move comes after some of the cash got into the hands of the general public after US$1 billion was blown up during a film shoot in Las Vegas.

Conning Assert Management, a money management firm in Hartford, Conn., has been dipping in to stable, non-telco credits in recent weeks in the new issue market. Among the trades, the firm applied for $50 million and got $20 million of Alcoa 6.5% of '11 ( A1/A+). Karen Kelleher, senior portfolio manager, says the 110 basis points over treasuries price is quite wide for such a stable company, which would have traded at 60-80 over 2 or 3 years ago. She believes spreads will narrow, and cites the good fundamentals for the aluminum industry.

Mitchell Capital Management swapped out of some treasuries two weeks ago by adding agencies and corporate bonds. The firm's treasuries allocation was cut by 8%, because government bonds have been bid up too much in value, says Ken Green, portfolio manager in Kansas City, Mo. However, he is comfortable with his current treasury allocation and does not plan to decrease it further.

Westwood Capital Management, a Dallas-based money manager, has been buying longer maturity off-the-run U.S. treasuries as yields climbed over 6% late last month. Portfolio manager Mark Freeman says he increased his Treasury allocation by 2% in the move. Freeman, who manages $700 million in taxable fixed income, may look to make further increases to his position in off-the-runs maturing in '23 and '16 if the economy appears to be stabilizing, indicating that the Federal Reserve has come close to the end of its easing cycle. He says the expected modest, rather than drastic, drop-off in consumer spending rates would be one important sign of such stabilization. He would finance the move by using new cash and selling intermediate-term treasuries.

Deutsche Bank has boosted its credit derivatives effort with hires in trading and structuring. Aelisa Kim Cipriani, director in the CDO team at Morgan Stanley in London, started Monday as a director in collateralized debt obligation structuring, according to Jeffrey D'Suza, head of European collateralized debt obligation business in London. This is a new position, he said, adding the department is growing in response to increased demand for structured products. Deutsche Bank also transferred Michael Furtado, a lawyer in the firmÕs legal department, to the CDO team. Furtado said he will focus on the execution and structuring of CDOs.

Credit derivatives practitioners panned the Basel Capital Adequacy Accord in formal responses submitted to the Bank for International Settlements last week. In particular, bankers and the International Swaps and Derivatives Association criticized the accord because it would require credit derivatives trading books to be better capitalized, doesn't allow for the joint probability of default and imposes a ceiling on the amount of regulatory relief banks can claim against credit derivatives positions, known as the w-factor.

Axa Investment Managers, a Hong Kong fund management subsidiary of Axa Holdings, will launch a fund later this year that will use over-the-counter and listed equity derivatives. "The launch of our absolute return fund will require the use of derivatives," said Barbara Shaw, head of Asian equities and balanced funds. She declined to reveal specific examples of the type of derivatives or strategies it will use. Axa, which has USD4.5 billion in assets, is talking with a number of investment banks in Hong Kong.

Five-year credit default swap spreads on Alcatel narrowed to 95 basis points Wednesday from 140 bps Tuesday after the company pulled out of a proposed merger with Lucent Technologies. Proprietary traders bought credit default swaps on Alcatel as the spread widened expecting it to continue widening if the merger went through, but as the deal was called off the spread came in.