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European hedge funds have started snapping up 10-year credit protection on sovereign names, including France, Germany and Portugal, which has resulted in spreads widening. One trader said his desk alone did USD1.5 billion in trades over the last several weeks--unusual in a market that could see weeks without a trade on a single sovereign name. Protection on Germany and France widened to nine basis points/13bps from 5bps/7bps two weeks ago, while protection on Portugal blew out to 16bps from 10bps. Traders said hedge funds also bought protection on Italy, Spain, Ireland and Belgium, but the core trades were on Germany and France.

Polaris Securities, one of Taiwan's largest securities houses with USD1.05 billion in assets, is examining buying credit-linked notes within a year, which would be the firm's first use of credit derivatives. "We're now considering this," said Ting Kuo, an official in the fixed-income department in Taipei. He explained that the firm is considering buying up to USD10 million of notes. "These offer a high rate of return," said Kuo, when comparing the products to traditional bonds.

An investor with a long or short position in an existing credit-default swap can monetise a change in the default swap premium, and realize profit and loss, in three ways:

"We are trying to point out which are the boring companies in the middle."--Chris Francis, head of international credit research at Merrill Lynch, speaking about its new first-to-default baskets, which are designed to have less volatility. For complete story, click here.

United Utilities has entered an interest rate swap to convert a GBP150 million (USD234.34 million) bond offering into a synthetic floating-rate security. Tom Fallon, treasurer at United Utilities in Warrington, U.K., said 95% of its income is generated from regulated monopolies--and is therefore indexed to inflation--so floating-rate liabilities are better matched to its revenue streams. The company is receiving the coupon on the bond in the swap, which is 5.25%, but Fallon would not disclose what United Utilities is paying in the transaction. He would also not disclose the counterparty on the swap. JPMorgan was the bond underwriter.

Portman Building Society, the fourth largest thrift in the U.K. with assets of nearly GBP10 billion (USD15.6 billion), is considering using credit derivatives for the first time. David Stunell, group treasurer in Bournemouth, U.K., said credit derivatives protection is an attractive option in light of deteriorating credit quality in its investment portfolio, which includes government and corporate bonds. In line with many of the U.K.'s largest thrifts, Portman marks its investments to market and therefore sees credit derivatives as a means for hedging out volatility in its earnings statement from unrealized losses.

Representatives of the U.S. credit derivatives market voted against implementing a restructuring definition proposed by European credit professionals by a majority of around 2:1 at last week's International Swaps and Derivatives Association meeting, according to bankers who attended the meeting. The vote, albeit informal and unbinding, is a major setback for efforts to establish a global restructuring definition. The meeting, which was attended by about 60 credit derivatives professionals, was held via video conference at Goldman Sachs' New York and London offices. Only about 20 of the attendees voted on the question of whether the U.S. market should adopt the Aug. 27 definition, also known as "modified-modified restructuring."

The cost of U.S. dollar/yen options slid into single digits last week after spot steadied at a fraction under JPY125. One-month implied volatility fell to 9.6% Thursday, down from 10.5% the week before. The yen hit a peak of JPY125.05 Wednesday, which was a significant level as there was a build up of options with strikes at this level, noted one trader in New York. The spot rate's immediate reversal to JPY124.25 caused implied volatility to fall, however, traders are bullish on the dollar strengthening and expect one-month vol to jump back into double figures in the short term.

The World Bank Group has entered a cross-currency interest-rate swap to convert a ZAR150 million (USD14.3 million) fixed rate bond into a euro-denominated synthetic floater. Hynd Bouhia, senior financial officer in Washington, said the bank pays a LIBOR-based floating liability in return for the 12.5% coupon on the bond. The swap mirrors the bond's two-year and three-month maturity.

Credit Agricole Indosuez Asset Management will reduce its exposure to U.S. Treasuries by 10% of its global fixed-income portfolio if there are indications the U.S. economy is emerging from its doldrums. Bruno Crastes, head of global fixed income at CAI in London, says, "We think the bond market is now in a bubble and a lot a cash has moved to U.S. as protection against risk." He says a trigger for the move could be the war in Iraq or some other kind of geopolitical event. Crastes has already reduced U.S. Treasury holdings from 30% of the E6.5 billion global fixed-income portfolio, to 20%, because he believes Treasuries have become too expensive. CAI has positions at the very short and very long ends of the curve, and those are the positions Crastes has been selling.

If this year's Loan Syndications and Trading Association conference is anything like last year's, there will be deep discussions on settlement, arguments on assignment fees and ... traders dancing at the podium.

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.