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Volkswagen Financial Services has entered an interest-rate swap to hedge a EUR50 million (USD46.5 million) floating-rate loan taken out last week. Clement Denks, treasurer in Braunschweig, Germany, said in the three-year EUR50 million (notional) swap the financial division of the German-based car company pays a fixed rate of 4.67% and receives three-month Euribor. The interest rate on the three-year loan is a few basis points above three-month Euribor. Three-month Euribor was 4.65% on Wednesday.

First American Asset Management has doubled its inflation-indexed bond exposure, from 2% to nearly 6%, by buying over $120 million in TIPS over the past six weeks, according to portfolio manager David Steele. The trade was driven not only by concerns about inflation, but also the perceived rich valuations of Treasuries, especially at the short end of the curve. The firm plans on remaining active, at least for the time being, in the 30-year TIPS sector. Steele plans on keeping the TIPS position at least until one of two things occur: the yield on the benchmark 10-year TIP bond drops through the 3% level (it is currently 3.50%), or the two-year note yield backs up 75 basis points, to 5.42% from its current 4.67% yield.

Morgan Stanley Dean Witter's nascent high yield index picked up a big backer recently when Barclays Global Inverstors' recently launched high yield index fund decided to use the MSDW index over the high-yield index from index titan Lehman Brothers. According to Thomas Sponholtz, head of fixed income product development at Barclay, "there was little choice but to use the MSDW index," given their belief that the Lehman index was simply not representative of today's junk market given the liquidity problems in the bonds underlying the Lehman offering. Sponholtz and his team compared the 200 liquid and widely held names in the MSDW HighYield Core Investible Index to the 1100 plus in the Lehman Brothers High Yield Index and concluded that the Lehman index did not replicate the market: "because many credits never trade, we had no idea where to price or value these credits."

Bond players are worried that a planned tax reform in the European Union could undermine the market. The change, which is set for March 1, would introduce a withholding tax for investors in EU countries with strong secrecy laws, such as Austria, Belgium and Luxembourg. Last November, the EU decided tax authorities should share information between countries on citizens who declared income, but there is a seven-year exemption for these countries to charge a withholding tax instead, until they change their banking laws to conform with the rest of the Union. Not only could this hurt the European banking industry as investors choose to open accounts in non-EU countries such as Switzerland, but it also will have far reaching effects on the European bond market.

Up-front fees on pro rata tranches increased to 4.3 basis points, just edging out last year's annual high of 4.2 basis points for every one million dollars committed in October and November. According to Portfolio Management Data, fees on institutional pieces remained consistent at 2.4 basis points, ticking up just enough to beat 2.3 basis points in December 2000.

Gannett Welsh & Kotler will look to shed some of its Treasuries with maturities of 23 or more years and the May of '16 STRIPS it owns for shorter-maturity agencies if the yield on the 30-year, which currently stands at 5.51%, reaches 5.30%. David Carter, lead portfolio manager for $400 million in taxable-fixed income, says he would make the move to defend against a possible rise in interest rates as economic growth picks back up following the current slowdown and round of Federal Reserve rate cuts. He says he could reduce the total amount of long-maturity bonds from 19% of the total portfolio to about 10%, and pegs the possibility of the long-bond yield falling to 5.30% at 50-50. He expects rates to continue to drift down as the economy slows, pointing in particular to the drop-off in consumer confidence, which he believes is "a huge driver" of the economy. He is awaiting more easing this year by the Fed, though he declines to speculate as to how much, and adds that a combination of loose fiscal and monetary policy could begin to produce a rebound by late 2001 or early next year, though not any sooner. "I think if it's going to be v-shaped it's going to be the roundest 'V' I've ever seen," he says.

Fifth Third/Maxus Investment Advisors is looking to boost its asset-backed allocation from roughly 3% of its $500 million taxable fixed-income portfolio to 10-15% in anticipation of a more prolonged economic downturn. James Bernard, senior fixed income portfolio manager, says he wants to sell corporates and agencies to buy ABS in order to have "real live assets backing up our debt, especially given the number of corporate credits that have balance sheet concerns in the down economy." As an intermediate buyer, he would look to four- to six-year credit-card and auto paper, sectors in which he believes he can find well-structured paper with decent prepayment lockouts. Bernard, whose purchases are usually $1-3 million in size, is not attracted to any names in particular, but he will steer clear of infrequent issuers whose paper is not as liquid. He adds that he is comfortable selling agencies because spreads have narrowed in recent months and there is still political risk associated with GSEs.

Schroder Salomon Smith Barney, Morgan Stanley Dean Witter and Commerzbank are pitching long DAX volatility trades to proprietary accounts and hedge funds to take advantage of a slump in implied vol to three-year lows. Greg Wolters, v.p.-equity derivatives sales at Credit Suisse First Boston in London, said two to three times the normal volume of DAX vol trades have gone through the over-the-counter market in the last two weeks. Typical positions being entered include vol swaps, straddles, strangles and calendar spreads.

ABN AMRO Bank is considering attempting to smooth its application to issue warrants in Taiwan by appealing to senior Ministry of Finance officials directly, rather than continue waiting for the Securities and Futures Commission and Bureau of Monetary Affairs, the banking regulator, to make a decision. It has already been waiting for nearly six months and is the first foreign bank to have applied, said an ABN official. The SFC and the Bureau both report to the Ministry of Finance. Officials at the SFC and Bureau of Monetary Affairs declined comment. English-speaking officials at the Ministry of Finance could not be found by press time.

Online credit derivatives trading platform creditex plans to offer asset swap trading, loan trading and a database of credit default swap spreads in the second quarter. Andrea Danese, coo in London, said creditex has now set up offices globally, and sees expanding its product range as the next step in growing the platform into a full credit platform. Access to the asset swap and loan market is essential for credit derivatives traders, who use these markets to hedge and price trades, according to Danese. Although the same is true of the bond market, it is already crowded with online platforms, he added. Only a handful of platforms exist for asset swaps and loan trading.