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One yard of one-year yen puts/dollar calls went through the London foreign exchange market last week. The options had strikes of JPY135-150 with one-year maturities, according to European-based traders and brokers. Proprietary traders were likely buying the options to hedge against a surprise tumble in the yen against the dollar, according to traders. The yen was trading at approximately JPY115 when these trades went through. David Bloom, foreign exchange strategist at HSBC in London, said if Japan decides to let its currency depreciate against the greenback in order to bring about an export-led economic recovery, then the JPY135 level could be reached. But with the U.S. facing its own growth problems, the U.S. may look to boost its exports and hence resist such a low exchange rate. HSBC's six-month forecast for the dollar is JPY107.

London-based traders bought euro calls/dollar puts with strikes at parity last week. The buying spree was initiated by dollar spot falling against the euro because of lower-than-expected National Association of Purchasing Management manufacturing survey figures published on Tuesday. The options had maturities of one-three months. The notional sizes were between USD20-50 million. One-month implied volatility stayed high amid the rise in spot, rising to 14.7/15% on Wednesday from 13.7%/14.1% the previous Friday. The lower-than-expected data led vol to rise, but traders added that some increase in vol was to be expected anyway. With the new year, players no longer fear time decay from holding options over the holiday season, and there is hence pent-up demand for options, which would lead to vol increasing. Spot rose from USD0.9305 on Friday to USD0.9460 on Wednesday.

London-based traders bought euro calls/dollar puts with strikes at parity last week. The buying spree was initiated by dollar spot falling against the euro because of lower-than-expected National Association of Purchasing Management manufacturing survey figures published on Tuesday. The options had maturities of one-three months. The notional sizes were between USD20-50 million. One-month implied volatility stayed high amid the rise in spot, rising to 14.7/15% on Wednesday from 13.7%/14.1% the previous Friday. The lower-than-expected data led vol to rise, but traders added that some increase in vol was to be expected anyway. With the new year, players no longer fear time decay from holding options over the holiday season, and there is hence pent-up demand for options, which would lead to vol increasing. Spot rose from USD0.9305 on Friday to USD0.9460 on Wednesday.

Bank Leumi U.S.A. will seek to use new cash and some of the proceeds from matured corporate-bond holdings to purchase high-quality asset-backed bonds, including those backed by credit-card and auto-loan receivables. The strategy is aimed at safeguarding against a slowdown in consumer and investment spending that would hit corporates. Robert Giordano, a senior v.p. who manages approximately $1.5 billion in taxable-fixed income, says he considers current Treasury rates too extreme. "I think it's fear that's driving the Treasury market," he says. Giordano, who is unsure how much cash he'll put to work, says spreads on top-flight three- and five-year ABS could tighten 10-15 basis points as fixed-income investors seek a safe haven in the early part of this year. He focuses on highly-structured ABS from big-name issuers, but will buy the occasional second tranche of a deal.

Segall Bryant & Hamill is funneling new cash, $5-10 million at a time, to agencies and existing corporate positions that it feels will withstand the nearing economic slowdown. Greg Hosbein, director of some $1 billion in fixed income, cites Interpublic Group Cos. (A3/A), an ad agency that has withstood past slowdowns thanks to solid financials, and building supply giant Lowe's Companies (A3/A), which could see increased business if housing finance rates fall, as two such credits. He says higher-quality financial services firms without commercial banking exposure, such as Household International (A3/A) and GE Capital (AAA/AAA), are also attractive, because of what appears to be a healthier consumer-loan market. Hosbein declined to disclose details on other corporate credits the firm is eyeing, but says he is focusing on the five- to 10-year part of the curve, which would benefit most from an easing of the Fed funds rate.

National City Investment Management will seek to use new cash to boost its allocations to select industrial credits that suffered spread-widening last year but could rebound as the Federal Reserve eases interest rates. Andy Harding, a portfolio manager in charge of some $4 billion in taxable fixed-income in Cleveland, says he is ready to make purchases on a security-by-security basis, adding that current spread levels are attractive. Among industrials, he likes long maturities and household names such as Dow Chemical, 170 basis points over the 30-year Treasury, Ford Motor Co. at 255 over, and Wal-Mart Stores at 115 over. The right corporate sectors should outperform structured products in the next six months, says Harding, noting that in some cases there is a 100 basis-point pick-up on a quality A-rated corporate credit versus five-year credit-card ABS. "And being an ABS/MBS guy, that's pretty strong coming from me," he adds. Though he has switched to lower coupons, Harding will maintain his weighting in MBS, which he has seen hold up even in a lower-rate environment.

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.

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