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Banking on the Federal Reserve cutting rates another 50 basis points in the short term,BNY Asset Management has been selling longer maturity treasury notes in favor of MBS, and possibly corporates further down the track. Margo Cook, who heads up the firm's $5 billion institutional fixed income division, says her most recent move was to sell long-term treasuries in favor of Ginnie Mae 7%s. "We've been moving more into 7%s and 7.5%s, because they've been beaten up by worries over refinancing, and we think those spreads will tighten."

And you think this market is claiming its share of bodies! A man who lost a fortune in the Milan stock market claims he snatched the corpse of legendary Italian banker Enrico Cuccia and would only return it when the market boomed again. According to Reuters, it was a move of desperation. "You will think I am mad, but I'm not. I'm just exasperated," the unidentified Italian wrote in a letter to the ANSA news agency. The man added in his letter that if the market didn't show signs of recovery by the end of the year, he would begin "hitting people in the world of finance and financial journalists, who like Cuccia, have contributed to my ruin." Police said they're keeping their options open.

Fifth Third Investment Advisors is planning to rotate $450 million from agencies (one- to three-year Fannie Mae and Freddie Mac paper) into a combination of corporate and MBS, says portfolio manager Mitch Stapley. In spite of the equity market downturn, the portfolio manager believes that the 4.3% unemployment rate reflects a strong job market, affecting select segments of the economy, such as telecoms, but has not had a negative effect on the broader service oriented aspects of the economy.

D.B. Fitzpatrick will be shortening the overall portfolio duration to index neutral by quarter-end, on the view that the effect of further interest rate cuts will be confined to the shorter end of the curve, says Brian McGrath, portfolio manager at the Boise, Idaho-based investment firm. McGrath, who manages a $200 million Treasuries and agency portfolio, will not change his current allocation, but move instead from intermediate range to short term.

Value Line Investment Management is buying the newly issued subordinated 10-year Fannie Mae (Aa2AA) and Freddie Mac (Aa2/AA) bonds on the view that their recent spread-widening was overdone. Bruce Alston, portfolio manager in New York, stocked up on the subordinated debentures from the GSEs at 33 basis points off the 10-year Treasury bond, reckoning he would reverse the trade at 20 basis points. He declined to reveal the amounts. Another program he recently executed was buying 6% conventional pass-throughs for yield-enhancement purposes, as they were trading at the $99 level. This brought his mortgage allocation up to 35% from 33%, a move of $18 million.

The Prague Stock Exchange, in a bid to increase liquidity and investor interest, is planning to open a derivatives market in the second half of the year, according to Vladimir Ezr, secretary general deputy and director of trading in Prague. He said the exchange is awaiting approval from the Czech Securities Commission, which should happen in the coming months, before going forward with the plan later in the year. The market would consist of listed derivatives, likely for local interest rates and the index, Ezr said. He said it could encompass other products as well, though he declined to speculate given the plan has yet to be approved by local regulators.

A unit of Samsung Capital has entered into a USD200 million cross-currency swap on the back of an asset backed security it issued in the U.S. The ABS securitized won-denominated auto-installment credit, but the bond pays a dollar-denominated coupon. As a result, in the five-year swap, the special purpose vehicle issuing the securities pays a fixed Korean won rate, 7.14%, and receives a margin over U.S. dollar LIBOR.

Williams is planning to set up a credit derivatives trading operation within about the next six months. The energy and communications company is looking at managing its internal credit risk and offering liquidity to corporates, according to Jones Murphy, director, hybrid derivatives in Tulsa, Okla. It will trade plain vanilla credit default swaps and structured credit products, with the bulk of its activity being in proprietary credit structures, which Murphy declined to describe.

Société Générale is structuring a EUR500 million (USD440 million) five-year synthetic collateralized debt obligation linked to companies in the Dow Jones Euro Stoxx 50. Pierre Matussiere, head of product management for credit derivatives in London, said the terms of the transaction have not been finalized, but investors in the portfolio will likely get EUR10 million of exposure to each of the 50 names in the portfolio. SG expects to back up the portfolio by selling protection on each name in the portfolio in the single-name credit default swap market. With the market uncertain about the future direction of corporate profits, credit default swap levels are wide, offering attractive yields to investors. This environment makes the timing right for such a product, said Matussiere.

Stark Investments is considering launching a global multi-strategy arbitrage fund next month in an effort to reach smaller institutional clients, including foundations and endowments. The Milwaukee-based firm, which manages some USD1.6 billion in assets split between high-net-worth and institutional clients, initially would seek to raise USD25 million in its first opening of the fund, which is set to be launched May 1, said Chris Greer, managing director of sales and marketing. The fund would use strategies including convertible and risk arb.

Options derive their value from underlying assets. In the case of traded underlyings, the option value is affected by the asset liquidity. The impact of liquidity on equities and bonds is a well-known phenomenon: selling the asset pushes the price down, buying the asset moves the price up. Option hedging is nothing but selling and buying some quantity of the underlying asset. Liquidity can be viewed as part of a chain reaction in hedging: changes in the asset value result in the option owner re-hedging which in turn impacts the asset's liquidity and so on. Therefore, liquidity has to be taken into account when pricing traded options.

CDC Ixis Asset Management plans to launch by the end of June two convertible arbitrage funds that will use derivatives. Dahlia Marteau, head of alternative fund management in Paris, said the funds will use equity, interest-rate and credit derivatives. One fund is expected to be approximately EUR500 million (USD440 million), and the other, EUR100 million.