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A liquid market for emerging-market collateralized debt obligation tranches is yet to materialize because tight spreads are stunting the number of deals being printed. "There is not the appetite for CDOs because compared to high-yield and crossover, spreads are too tight," said one London-based structurer. The price of protection on the CDX EM diversified, which comprises 40 equally-weighted sovereigns and corporates, is around 88 basis points, compared to 292 bps for the CDX North American High Yield index.

Australian interest-rate traders have noted a recent surge in activity, after a rate hike two weeks ago attracted greater overseas interest. "The shape of the curve is starting to steepen and opportunities are there--this is putting Australia back on the radar for offshore players," said a senior interest-rate dealer at a domestic bank. He noted volumes in the domestic swap market have picked up by one and a half times since last year on the back of potential rate rises.

The International Finance Corp. has entered a swap to receive floating rates after placing a fixed-rated bond. The U.S. dollar swap was arranged off the back of a USD1 billion, 5.125%, five-year note issue by the private-sector arm of the World Bank Group.

Private Danish bank Sydbank is looking to issue and manage a synthetic collateralized debt obligation referencing emerging-market debt. Structurers from the firm declined to comment on details of the developing structure, beyond noting it will follow in the footsteps of two emerging market transactions currently under management. These include Eirles Two, which was structured by Deutsche Bank in 2004.

The Asian Development Bank will raise around $3 billion in local currency bonds in Indonesia and Kazakhstan before the end of the year. This is the first time the ADB has issued a bond on behalf of Kazakhstan. The ADB has already raised funds worth $2 billion this year. Standard and Poor's director of sovereign ratings in Singapore, Takahira Ogawa said that there is increasing interest being in local currency debt from investors globally. ADB's head of funding Juan Limandibrata, said the bank will offer at least $1 billion of dollar-denominated bonds to international investors in the second half of 2006.

Rabobank is launching a New York equity and fund derivatives group and has hired two structurers to pioneer the effort.

The creation of tax-deductible, high equity credit hybrids promises to have a profound influence on the corporate market. However, the lack of precedents for the sector and different industry dynamics means that creating the optimal instrument for an individual issuer is tricky. Despite the attractions of hybrids to those involved in M&A, or share buyback programmes, corporates are treading carefully.

With tens of billions of old-style hybrid instruments callable in the next 12 months, the arrival of tax-deductible high equity credit securities is fortuitous for financial institutions. Bank issuance could be further boosted by M&A activity as well as a greater focus on optimising capital structures. And for insurance companies the development is even more important, given their focus on rating agency rather than regulatory capital targets.

US Bancorp has seized the new opportunities available in the hybrid market with both hands to help it meet new capital ratio targets. Daryl Bible, its treasurer, explains the rationale for its new goals and how the new generation of hybrids are helping it meet them.

The possibility of creating securities that are given high equity credit from the rating agencies, meet regulatory requirements where appropriate, and yet are tax-deductible has resulted in a surge of hybrid securities issuance in the past year. This has been very timely given investors' appetite for higher yielding securities in a low yield, tight spread environment. But recent developments have raised questions over how long this fertile climate will last.

The outperformance potential of hybrids means that the product is difficult to ignore for many investors. But early questions over the correct analysis of credit quality, structural features, and the true nature of the investor base have meant that buyers have been forced up a steep learning curve and are becoming increasingly discerning.