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Credit-default protection on telecom companies tightened on Tuesday, grinding in even further Wednesday morning. The moves were sparked by the credits' improving equity performance and investors showed comfort that companies have begun to take needed write-downs from investments in third-generation licenses, said traders in London. In addition, Deutsche Telekom announced it was on track to report higher full-year earnings compared with last year, which tightened the price of its five-year protection to 270 basis points/280bps on Wednesday morning from 295bps/300bps on Monday, according to traders.

UBS Warburg has started publishing a weekly equity derivatives research report on South Africa for institutional investor clients. John Gilchrist, director and head of equity derivatives for South Africa, said the report will focus on the listed derivatives market, but will include commentary on over-the-counter derivatives where it impacts pricing.

The cost of U.S. dollar/euro options fell last week in line with a stronger dollar and gains in the U.S. equity markets amid quiet end-of-summer trading. One-week euro/dollar implied volatility fell to 9.75% Thursday in New York from 11.25% Monday, according to traders. "The dollar has recovered somewhat on stronger stock prices, so vols are lower," summed up one trader. He said higher U.S. equities last week seemed to be offsetting a longer-term trend that bodes well for the euro. The Federal Reserve's shift toward a tightening bias earlier this month and the increasing realization that short-term interest rates, and thus yields, will be higher in Europe is positive for the euro. With that in mind, a common trade last week was for investors to buy long-dated euro calls with strikes at parity and above. But short-term that move higher is unlikely to happen. "People are willing to bet that trend is not going to come into play in the next week, otherwise they wouldn't be selling volatility," a trader said. Spot was USD0.97 Thursday, down from USD0.981 Wednesday.

Taplin, Canida & Habacht was planning to buy $10-20 million in General Motors 8% notes of '31 (A2/BBB+) last week. Bill Canida, portfolio manager of the firm's $4.5 billion in taxable fixed-income, says auto spreads are at historic wides, and he does not believe the Big Three automakers are a legitimate bankruptcy risk. The GM paper was trading at 291 basis points over 30-year Treasuries last Monday. The money manager has already been buying the GM bonds, as well as the Ford Motor Co. 7.45% notes of '31 (A3/BBB+), which were trading at 387 basis points over 30-year Treasuries last Monday, and the 7.375% notes of '11, which were trading at 396 over 10-year Treasuries. Canida says the firm will not add more Ford paper because it is already fully allocated, and he believes Daimler Chrysler's bonds are still trading too tight relative to those of its competitors.

Steven Jones, portfolio manager with Missouri Valley Partners, says that when the 10-year Treasury yield rises to 5%, he will extend the portfolio's duration to 4.30-years from its current 3.90-year duration, or 10% longer, by adding Treasuries. Jones says last Monday's 4.28% Treasury yield is not sustainable, citing his firm's bullish economic forecast. Jones adds that when he hits his 10-year Treasury yield trigger, he will rotate 10% of the firm's portfolio, or $80 million, into 10-year Treasuries. He will finance the purchase by using cash and selling high-grade corporates.

Pictet & Cie, which manages SF20 billion in fixed-income assets, E3.5 billion of which is devoted to European fixed income, is looking to sell volatility embedded in bonds or in options directly, says Rajeev de Mello, fund manager. "I think some of the volatility in bond markets will calm down. I'm not convinced central banks will cut rates, which will take volatility out of markets. It's an easy trade to make in this environment," he says.

Despite the extension on collateral requirements given last week to NRG Energy from its lenders, fixed-income analysts on the buy- and sell-sides say the banks may still decide to pull the plug on the independent power producer. Even those who believe the banks are unlikely to force the company into default say that such an event would cause another wave of selling in the IPP sector--just as bond prices are showing signs of a recovery. "A nation of sheep is investing in these things. It would not be a positive development," says one East Coast buy-side analyst.

High-yield portfolio managers are once again looking at high-grade names, as the recent stock market rally has had a more demonstrative effect on the high-grade market than on high-yield. These names began seeing interest from high-yield portfolio managers as early as May (BW, 5/26) but have dropped in price considerably since then.

Deutsche Bank hired Tim McDevvitt and Rich Willard to be investment-grade traders on their New York corporate bond desk. The two resigned last Friday morning from Merrill Lynch, according to a person close to the situation. They will report to Stephen Murphy, head of U.S. corporate bond trading, says Ted Meyer, a firm spokesman. Meyer says he is uncertain as to what sectors they will be responsible for. A call to Merrill Lynch to determine possible replacements was not returned.

At least one high-yield gaming analyst and one portfolio manager believe a planned $350 million junk deal by Wynn Resorts to build a Las Vegas casino called La Reve will provide an important gauge of the market's interest in buying new paper. The deal, set to hit the road after Labor Day, is sure to attract attention, if only because, in the words of one analyst, "Steve Wynn is about as close as you get to God in high-yield gaming." While gaming paper has been in favor through most of the economic slump, only one project finance deal has been sold in the sector this year. The analyst believes Wynn will be able to pull it off because his name will carry weight with investors.

Norddeutsche Landesbank (NORD/LB) has added Hervy Dawit as an asset backed securities transactor for its conduit business and is seeking a senior ABS credit analyst, says Omar Bolli, senior v.p. and head of asset-backed finance.

The high-yield market was on fire last week as of Thursday's close, particularly Wednesday and Thursday. Rallies came in a wide range of sectors, and traders saw a great deal of short covering. Here is selected action.