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Cavanaugh Capital Management is selling intermediate sector treasuries and buying intermediate agencies because of the attractiveness of agency spreads on a historical basis, according to President Jim Dugan. Dugan characterizes this move as a rotation from a treasury allocation of 35% to about 23%, or $65 million dollars, noting that he is about halfway done. He says that in addition to the possibility of capturing some spread tightening in the GSE paper, he also sees the three- to seven-year treasury market as being at the tail end of a year-long rally, and is anticipating a gradual back-up in rates as economic growth slows and inflation trends (slightly) north.

American United Life has been putting new cash flows to work in heavily structured CMOs to get the duration they need to meet their asset and liability needs, according to portfolio manager Kent Adams in Indianapolis. Adams, who oversees the firms $4.7 billion fixed-income account for its insurance company parent, particularly likes NAS (non-accelerated senior) bonds, especially the AA tranches, for their stable prepayment and extension characteristics. This paper is crafted from whole-loan Jumbo (mortgages issued in amounts greater than $272,000) CMOs and Adams says that he is drawn to it because of the attractive spread levels they offer, usually 170-200 basis points off the curve. Moreover, Adams says that with some seasoning, these bonds can often receive ratings upgrades, and tighten a further 25 basis points. Adams also has been buying RELO bonds, or CMOs carved from mortgages issued to people who relocate frequently. While he acknowledges that the prepayment speeds are high, they are consistently stable and the bonds pose little threat of extension risk. Adams has been buying them at up to 200 basis points off the curve.

Hyperion Capital Management is looking at rotating $100 million from U.S. corporates to ABS for over the next two quarters, as soon as corporate spreads go back to more normal historical levels against swaps, says Dominick Bonnano, portfolio manager with the New York-based investment firm. He sees this as being perhaps an additional 20-30 basis point further in along the five-10 year swap curve, but would not speculate as to when this might occur, other than to say it will happen in the next two quarters.

Code red! One trader made a clever play on words last week when asked to describe a plunging credit. Dealers are routinely asked to give "color" on a deal, and many usually go into a synopsis of the credit's history or reputation. This dealer cut right to the chase and gave the credit real color. "Red," he replied. "Just flashing red."

Atmos Energy is considering purchasing heating degree day put options in order to hedge against the possibility of warm weather next winter. Laurie Sherwood, v.p., treasurer in Dallas, said the natural gas distribution company's success with hdd options last winter is spurring its shopping for similar coverage for next winter. She declined to elaborate on the precise positions Atmos is eyeing for next winter.

Bank of America in Seoul has hired a five-strong team of fixed income cash and derivatives professionals fromJ.P. Morgan Chase. "We're building our capabilities in a number of markets in Asia," said Gordon Sangster, managing director, head of global markets group Asia at BofA in Hong Kong. "There are a lot of good opportunities in Korea. We were looking to hire a good team and this one was available. They should fit well," he continued.

CDC IXIS Capital Markets is setting up an alternative risk transfer desk to trade weather, catastrophe, life and automobile insurance risk. Michel Queruel, head of alternative risk structuring in Paris, said the bank is ready to trade weather risk via insurance and derivatives products, but it will take a couple of months to start trading the other types of risk.

Volumes have shot up in the Czech interest-rate derivatives market over the last month as macroeconomic changes have created disagreement over the direction of interest rates there, according to traders in London, Frankfurt and Prague. Simon Stuart-Smith, eastern European currencies derivatives trader at Bankgesellschaft Berlin in London, said he now trades six to seven Czech swaps a day compared to one or two earlier in the year.

Sempra Energy Trading plans to start offering weather derivatives to its customer base in the next several weeks and will also start trading the instruments on a proprietary basis. Sempra is looking to enter the market now because liquidity has improved, and because customers have grown increasingly interested in the products, according to Jackie Mitchell, managing director, overseeing West Coast natural gas operations in Stamford, Conn.

Comments on the Basel Committee on Banking Supervision's proposed New Basel Capital Accord for banks are due on May 31. The proposed accord would include much more detailed treatment than current international risk-based capital standards for banks that offer or purchase credit derivatives, or that perform various roles in synthetic securitizations effected through credit derivatives. The Basel Committee is continuing to discuss many issues in these areas, particularly regarding synthetic securitizations.