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The unwinding of swaps and futures led to massive movements in the over-the-counter interest-rate derivatives market last week, as some hedge funds and proprietary desks sold in advance of the end of the month when many, particularly in the U.S., close their books for the year. The activity led to substantial moves in all swap spreads. For example, in the U.S., the more liquid two-year spreads widened to 3.8% from 3.52% last Tuesday, a huge move when compared to the daily average of roughly seven basis points, according to traders and strategists. A relatively benign week of U.S. economic figures also contributed, leading punters to speculate interest rates may start to raise early next year.

Madison, Wis.-based Alliant Energy recently hedged a portion of its weather risk for the winter by buying a heating-degree-day put on the average temperature in Madison from November through March, said Bill Zorr, general manager of gas trading. In the transaction, Alliant will receive a payout from Hess Energy Trading Co. if the temperature is warmer than the 10-year average in Wisconsin. Zorr declined to specify the exact sum the company will receive, but said it was enough capital to cover the lost revenue the company would have received if it sold gas to customers during a cold winter. If the winter is colder than the 10-year average then the deal expires out-of-the-money.

Global Asset Management (GAM) plans to add to its holdings of French, German and Italian sovereigns. Ron Tabbouche, London-based portfolio manager, says it will wait for European government bonds to bottom out before making the move. Once the yield on U.S. Treasury five-year paper reaches 5.25% and German five-year paper is at about 5%, the firm will put some of the cash in its $250 million global bond portfolio to work. Last Tuesday, the German five-year note was yielding 4.25% and the U.S. five-year yielded 4.33%. He declined to specify exactly how much would be rotated into the sector. GAM will seek to add longer-dated paper, anywhere from five years and up, because he says short-term interest rates will continue to decline, and that, coupled with inflation, should lead to curve flattening.

Traders who can usually explain the front, back and side of a deal fell silent when asked about the bank debt for Enron Corporation, currently the most notorious--and most confusing--credit in the market. When asked how much of the deal is secured and unsecured, a trader replied with a laugh, "If you can figure it out, you should become a credit officer." Another just waved the white flag of resignation. "It's too complicated for my simplified mind," he said.

The Bank of Oklahoma Financial Corporation, the Tulsa-based holding company that includes the Bank's funds from Oklahoma and several other states, is seeking to pick up additional yield by adding $300-400 million in 2.5- to three-year planned amortization class and sequential commercial mortgage obligations. Lee Allen, manager of $3 billion in taxable fixed-income, says the holding company would sell one-year CMOs to finance the purchase. Before he invests, Allen wants to see five-year Treasury yields drop to 4.10% or 4.15%: last Thursday, five-year yields were 4.21%. He says such a move would suggest economic weakness as well as the stabilization of five-year rates, and convince him that the Federal Reserve will remove its easing bias on short-term interest rates. Allen says the holding company would probably add 6% coupons to guard against prepayments. However, he would consider 6.5% coupons, if the unemployment rate tapered off at 5.5% and retail sales numbers showed strength.

Sage Advisory Services is swapping 15%, or $75 million, of its $500 million portfolio, out of agency debentures into spread product, specifically corporates and mortgage-backed securities. Bob Smith, portfolio manager at the Austin, Texas-based firm, says the agency debentures are being sold because the firm believes interest rates have bottomed out, diminishing the benefits attached to owning positive convexity. Smith will seek to sell straight non-callable, or bullet, Fannie Mae and Freddie Mac bonds in the five- to seven-year sector. The firm has already begun the move.

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.

UBS Warburg managed to oversubscribe the "B" tranche of its deal for Neptune Technologies, despite gripes from some investors that pricing on the deal was not high enough to garner support. A UBS syndications banker said 19 institutions came in on the $125 million tranche, oversubscribing the piece by a little more than $100 million right before the Thanksgiving holiday. He said the bank expected to do final allocations by the end of last week with commitment sizes ranging between $10-15 million on the deal that had leverage issues raising concern among investors. "It's a small deal but those who did their homework were able to get around it," he said, noting that the leverage multiple of 3.8X on the deal was a tough hurdle for some along with the small size of the deal. "It's a pretty defensive business," he added. Another banker noted that stable operating results won out over leverage concerns with an institutional market looking to invest cash.

The institutional round of SunTrust's deal for U.S. Xpress has been postponed until next year after the term loan "B" struggled through syndication and existing lenders decided it was best to come back to the market when a better environment exists for the credit. A banker close to the deal said SunTrust, along with existing lenders Wachovia Securities, Bank of America and FleetBoston Financial, have extended the company's existing $225 million deal, rolling over their commitments. Originally, the company came to market to refinance its existing deal. The banker declined to comment on whether or not pricing on the deal changed due to the extension. Ray Harlin, cfo, did not return calls by press time.

After a huge calendar in the week prior to Thanksgiving the market has essentially closed down the past two weeks with just $13.8 billion priced. The weighted average maturity continues to lengthen as BBB credits look to lock in attractive long rates even as the Treasury market backs up. For their part, investors appear to have a strong appetite still for longer-dated paper. One other trend worth noting is the pickup in high yield issuance. Since the bond and equity markets have started pricing in a robust first half recovery in the economy, the high yield market has been well bid, retracing about 80% of its post 9/11 losses. This strength has been further supported by flows into high yield funds, which totaled about $1.5 billion in the previous two weeks.

Investors in Indosuez Capital Funding IV, a $1.3 billion collateralized debt obligation managed by Crédit Agricole Indosuez, reportedly voted to switch management over to Royal Bank of Canada last week, citing the defection of portfolio manager Dan Smith and other key staff to RBC last month. Smith confirmed that a majority of the controlling noteholders has rejected Crédit Agricole Indosuez as the fund's current manager and appointed RBC as the successor on the deal, but declined further comment. But Paul Travers, portfolio manager at Crédit Agricole Indosuez, said a new management team is not managing the fund. He declined to comment on whether a vote had taken place to supplant the deal's management team, but said, "We have not lost any funds. We are managing the funds as if we will own them forever."