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Equity derivatives traders in Hong Kong and Japan are prepping index arb trades to take advantage of a rebalancing of the Hang Seng Index, which is set to occur June 1. While some of the trades are filtering through the over-the-counter market, most of action has been in exchange-traded instruments, such as warrants.

Spreads on three-year credit default protection on Verizon Communications widened last week after the telecommunications giant sold USD3 billion in convertible bonds. Before the zero-coupon, 20-year issue Wednesday, default swap levels on New York-based Verizon were at around 65/75 basis points, according to a credit derivatives trader in New York. As DW went to press on Friday, those levels had widened by about 20 bps, to around 85/95 bps. He added that convertible bond issues tend to push spreads out.

Yuan Ta Securities, a securities house in Taiwan, is talking with potential counterparties about pioneering a local market for convertible bond asset swaps.Samuel Wang, manager in Taipei, said the firm recently received a Securities and Futures Commission license to enter swaps on convertibles. The nascent convertible market could reach to TWD50-60 billion (USD1.5-1.8 billion) and this likely would fuel substantial demand for swaps. Officials at the SFC could not be reached.

Predicting a 5-5.5% unemployment rate by year-end, Furman Selz Capital Management plans to sell 5-8% of his (or $80-130 million) two- to three-year government bonds exposure and buy in the seven- to ten-year range, according to portfolio manager Alan Segars. Segars, who helps manage the firms $1.6 billion fixed-income account, is doing this to increase the duration of its portfolio from 3.7-3.8 to about 4.0 years. He expects the Federal Reserve Board to cut another 50 basis points at its meeting tomorrow, and eventually take rates under 4% before year-end. "There's typically a lag between a fall-off in consumer confidence and a fall-off in consumption...As initial claims rise and unemployment goes up, people will start altering their buying plans." Segars' accounts are benchmarked against the Lehman Brothers Intermediate Government Corporate Bond Index.

The Kansas City Life Insurance Company in Kansas City, Missouri, is looking to add up to $50 million in healthcare debt. Scott Stone, head of the firm's $2.2 billion taxable fixed income portfolio, says congressional cutbacks to Medicare over the last three years bankrupted several healthcare providers, but the survivors of the cuts have come back stronger. That, combined with an aging baby-boomer population, makes healthcare look like a promising sector, and he'll be looking to buy high-rated junk to investment grade debt. Stone declines to discuss specific companies or credits, and says that his sector shifts are typically no more than a few million dollars in size. He declined to specify what would trigger his move, or why it will be bigger than previous reallocations.

Loomis Sayles & Company is planning on rotating $200-400 million from investment-grade corporate bonds into MBS to capture the next big spread product move, says portfolio manager Curt Mitchell. He is waiting for single-A corporate 10-year swap spreads to tighten from 80 basis points off treasuries to the 70 basis point level before firing up the move.

The Deal Roll-off Chart, provided by Capital DATA Loanware, lists the 50 largest leveraged credit facilities in the U.S. market that are due to mature in the coming month. It is designed to provide a look at potentially available money in the market as credits are renewed or retired.

The economy's response to both fiscal and monetary stimulus will lead to a rebound in equities and a backup in bond yields, making this a good time to play cyclical credits, argues Dan Portanova, portfolio manager with GroupAMA Asset Management. Portanova, manager of the firm's $700 million fixed-income account, employing a "get in early" style of investing, has recently participated in the Lehman Brothers Holdings and Morgan Stanley Dean Witter bond offerings. He bought the Lehman Brothers 6 1/4% notes of '06 (A2/A) because he sees them as a pure play on the presumed rebound of the institutional trading and sales business. He bought the Morgan Stanley Dean Witter 6 3/4% notes of '11 (Aa3/AA-) not only for the strength of its institutional businesses, but its diversity of earnings streams, including advisory and asset management services.

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.

Integrated Health Services bank debt last week traded up to the 46 1/2 to 47 range, up from 44-45. A total of $40 million changed hands over the course of the week. Dealers continue to attribute the levels to an improving industry. "Health care credits are up because the companies are up," said a dealer. Integrated Health, based in Sparks, Md., owns or operates approximately 365 nursing homes and 15 specialty hospitals that offer wound management, cardiac care, Alzheimer's disease treatment, and other rehabilitation services.

Long Island City, New York-based Standard Motor Products, Inc., has secured a $225 million revolving credit with GE Capital, which landed the lead over four other bidders, noted James Burke, cfo. The five-year credit represents the company's first foray into secured loan territory and Burke said the firm won with the most competitive bid. "GE Capital was picked to lead the deal following tough negotiations with five interested parties," Burke added, declining to name the competition. A mixture of factors including personnel narrowed the parade to two, and then flexible pricing and the overall package led to a decision, Burke explained.