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Twenty-five delta one-month risk reversals showed a stronger bias in favor of euro calls/dollar puts in the last two weeks after the euro started to strengthen against the greenback. Traders said market makers were snapping up risk reversals in anticipation of further euro upside. The one-month risk reversal jumped to 0.81 in favor of euro calls/dollar puts Wednesday from 0.2 two weeks ago. Implied volatility shot up across the board. One-month vol was 12.1% Wednesday from 10.85% two weeks ago as the euro appreciated to USD0.8796 from USD0.8552 in the spot market.

Stone Ridge Investment Partners plans to shorten duration by 2.5% if the 10-year Treasury closes with a yield at or below 5%: it would cut duration to 4.39-years from its current 4.5-year level. Last Monday, the 10-year was at 5.10%. David Killian, portfolio manager, says he would buy two- and 30-year U.S. Treasuries, selling intermediate maturity Treasuries to shorten duration. He says he has no idea whether yields will fall below 5%. He believes the Federal Reserve has mostly finished easing rates, because the most recent cut was only 25 basis points instead of the 50 many had expected.

What does it take to be a trader? A few market players with a little downtime offered some qualifications. According to one, you must be able to juggle three questions at once and have a great short-term memory. "You don't have to be the best credit guy, and a psychology degree doesn't hurt," he said. Another dealer was a bit more succinct: "You have to be really, really smart in your own mind."

Ziegler Investment Services Group will swap $70 million, or 10% of its overall portfolio, from Treasuries into corporates, on the view that corporate spreads should eventually begin to tighten, forcing Treasuries to underperform, according to portfolio manager Brian Andrew. Andrew says he is anticipating an economic recovery in the last quarter, which is why he's seeking to commence his rotation immediately. He says that he will concentrate his purchases on the five- to seven-year sectors because he expects yields to rise on 10-year and longer maturities, as the intermediate range should remain stable or tighter.

Margaret Patel, portfolio manager of a high-yield fund with Boston-based Pioneer Investment Management, says her firm is concentrating on four sectors: energy, healthcare, paper and forest products and technology. She adds that her firm is staying away from high-yield telecom bonds, due to the continued credit deterioration in this sector. An internal policy bans investments in the gaming sector.

Los Angeles-based Trust Company of the West has been adding to defensive high-yield sectors such as cable, media, broadcasting and gaming. Melissa Weiler, portfolio manager in the $5 billion high-yield group, says companies in those sectors are asset-rich and have relatively stable cash flow. Further, they receive a lot of equity funding, placing bondholders in a relatively attractive position in the capital structure. For example, TCW purchased PrimeMedia 87Ž8% senior notes of '11 (Ba3/BB-), when they fell from $95-96 to the low 90's after announcing an acquisition earlier this month. When it became clear that the acquisition would be funded through equity, the paper rebounded, and was trading at $96 last week. TCW recently bought new issues by Quebecor (B2/BB-) and the Mediacom 11% notes of '13 (B2/B+). It also picked up some Charter Communications notes of '11 (B2/B+) when those bonds dropped about two points on rumors that the firm would try to compete with Comcast for AT&T's cable business.

Is The Fed Still Too Tight?

Van Kampen Investments has laid off its Oakbrook Terrace, Ill. taxable fixed-income team and shifted the assets they manage--some $6.5 billion divided between several high-yield, government, and investment-grade funds--to fixed-income managers at Miller Anderson & Sherrerd (MAS), in West Conshohocken, Pa., according to a Van Kampen spokeswoman. The managers laid off as a result of the changes are Ted Mundy, manager of several government funds, investment-grade manager Kelly Gilbert, and high-yield manager Robert Hickey referred all calls to the firm spokeswoman. Van Kampen and Miller Anderson are subsidiaries of Morgan Stanley Investment Management. The spokeswoman says the move was not a cost-cutting measure nor related to poor performance, but rather was done to consolidate the firm's fixed-income operations in the hands of the managers with the most resources.

Texas-based Alamosa PCS, the largest of the Sprint affiliates, is working to renegotiate the covenants on its $305 million senior secured credit facility, and may face higher pricing if it cannot renegotiate them, according to an analyst who is in discussions with the wireless company. Alamosa violated its first quarter covenant on the loan when it reported an EBITDA deficit of $16.7 million. Under the covenant, Alamosa could not exceed an EBITDA deficit of $9.7 million. The loan was priced at LIBOR plus 4%, and Alamosa could face as much as a 25 basis point penalty if it exceeds the EBITDA deficit for the second quarter, according to analysts. The syndicate gave the company a pass on the violation for the first quarter, but analysts contend that if it happens again, Alamosa will be penalized. Kendall Cowen, cfo at Alamosa, did not return calls by press time. Lead arrangers are TD Securities and First Union.

A recent company announcement that it may default on its credit facility prompted Arch Wireless' debt to take a 20 point drop last week and finally land in the mid-20s, dealers reported. There was a small trade on Tuesday at 26, and dealers said roughly $10 million total has traded. Buyers and sellers could not be ascertained, but one dealer said levels have dropped so quickly because "there are no buyers." Levels were in the 50 range just two weeks ago. "It's getting crushed like a grape," a trader marveled. Another market watcher called the plummet "really ugly." When asked why Arch's debt has traded down so quickly, he replied, "How many people do you see using pagers?" The company has a $600 million deal led by Bank of New York, Barclays Capital, Royal Bank of Canada and TD Securities that breaks down into three tranches. Pricing is LIBOR plus 3 1/2 %. Officials at all banks either declined comment or did not return calls. Calls to Roy Pottle, cfo at Arch, were not returned by press time.

Joy Global, the new company name for Harnischfeger Industries, which has emerged from bankruptcy protection, has closed on a new $350 million four-and-a-half-year senior secured credit facility withDeutsche Bank. Kenneth Hiltz, senior v.p. and cfo of the Milwaukee, Wisconsin-based company, said the facility will be used to fund emergence costs from bankruptcy, to refinance the debtor-in-possession facility and for general corporate purposes.