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Baltimore-based commercial bank All First, a subsidiary of First Maryland Bancorp, is looking to enter U.S. dollar interest-rate swaps by year-end to hedge the interest-rate exposure on its USD4 billion liability portfolio. The bank has not used derivatives since the beginning of the year because the introduction of the Financial Accounting Standards Board's rule 133 has deterred it and other end users concerned that being required to mark derivatives positions to market will introduce volatility in the earnings statement.

Credit default protection tightened on auto names last week on the back of increased demand for auto paper. "People feel that the auto sector is a safe place to put money," said a credit derivatives trader in New York, adding that auto paper offers relatively high returns for its credit rating. The most actively traded name was General Motors Acceptance Corp, a subsidiary of General Motors Corp. Traders in the U.S. said five-year credit default protection on GMAC came in five basis points from 66bps-71bps last week. A trader noted that while a number of corporates were buying protection, much of the action took place in the interbank market. Traders predicted GMAC will continue to tighten in the coming weeks, and could punch through the 60bps level. One trader estimated USD100-200 million of credit protection on GMAC was bought last week.

Barclays Capital has hired David Hannan, equity derivatives salesman at HSBC in Tokyo, in a similar position. He joined the bank two weeks ago and covers primarily listed options and futures but will also cover over-the-counter equity derivatives for the Japanese and Asian markets. He reports to Alasdair Hodge, Asian head of futures in London. Hodge said the firm is looking to build up its presence in Asia, and will look to expand the sales team.

BNP Paribas has hired Eero Polus, v.p. of foreign exchange markets at Citibank, as senior v.p. of spot and derivative foreign exchange sales in San Francisco. He started in the new position last week and reports to Alain Pigois, head of foreign exchange in San Francisco. Polus, who was with Citibank for nearly 15 years, serving the last six in its San Francisco office, is BNP Paribas' latest hire in an ongoing expansion of its San Francisco global foreign exchange division. He joins a team of four marketing and sales professionals.

Bank of America is structuring a USD600 million synthetic collateralized debt obligation on Far Eastern debt, which bankers believe could be the first of its type. The deal, which is expected to come to market in the coming weeks, is unusual because the reference portfolio consists exclusively of Asian and Australian credits. Synthetic CDOs that include Asian names typically also have exposure to European and U.S. names for diversification and because there are relatively few liquid credit default swaps in the Asian market. Officials at BofA declined to comment.

Hong Kong-based ICBC (Asia), a subsidiary of the largest state-owned commercial bank in China, is planning to launch an interest-rate derivatives trading operation. Benny Lam, deputy treasurer in Hong Kong, said the bank intends to trade Hong Kong dollar and U.S. dollar interest-rate derivatives, primarily to hedge exposure on the bank's investment portfolio, but will also execute customer flow business. He declined comment on a timeframe for the plans or the details and composition of ICBC's investment portfolio. Lam said ICBC wants to set up an interest-rate derivative desk to meet customer demand and because it regularly uses interest-rate derivatives for hedging.

Citibank is recommending corporates buy dollars against the Swiss franc because the options are cheap because the market is positioning for further dollar depreciation against the Swissie. T.J. Marta, foreign exchange strategist at Citigroup in New York, said demand for Swiss franc calls means now is a good time to buy dollar calls at low premiums. The one-month 25-delta risk reversal shows a 1.25 bias in favor of Swiss calls/dollar puts. There have only been two other occasions, the collapse of Long-Term Capital Management in 1998 and the introduction of the euro in 1999, when dollar/Swissie risk reversals have been this skewed in the last nine years.

Credit Suisse First Boston and Cantor Fitzgerald are beefing up their U.S. interest-rate swap desks in the expectation that the swaps curve will topple the Treasury yield curve as the fixed income market's benchmark. The two firms are voting with their feet at a time when others are still debating whether swaps or Agencies will unseat Treasuries' benchmark status.

Unlike vanilla interest-rate swap prices, constant maturity swap prices depend on volatility. This Learning Curve reviews the key points in CMS swap pricing and highlights the impact that the interest rate volatility smile can have in pricing.

Montgomery Asset Management will rotate from Treasuries into mortgage passthroughs for an additional 5% of its portfolio, or $155 million, says Thomas O'Connor, portfolio manager of the Walnut Creek, Calif.-based asset management firm. O'Connor says that he has already rotated 10% of the overall portfolio, or $310 million, by putting on this trade.

Baxter Capital Management, an Indianapolis money management firm with $1.4 billion in taxable fixed-income, plans to lower its duration and add some $20 million in lower-rated corporate bonds. Gary Baxter, portfolio manager, says economic indicators, including those in the manufacturing sector, seem to be bottoming out, and he believes interest rates will soon begin to rise as investors gain confidence that a turnaround is imminent. Last Monday, the 10-year note was yielding 5.16%, and 30-year bonds were yielding 5.57%. Baxter says an increase of 10 basis points in each of those yields will convince the firm to lower duration by 0.4-years, largely by selling longer-dated Treasuries.