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Cavanaugh Capital Management is selling intermediate sector treasuries and buying intermediate agencies because of the attractiveness of agency spreads on a historical basis, according to President Jim Dugan. Dugan characterizes this move as a rotation from a treasury allocation of 35% to about 23%, or $65 million dollars, noting that he is about halfway done. He says that in addition to the possibility of capturing some spread tightening in the GSE paper, he also sees the three- to seven-year treasury market as being at the tail end of a year-long rally, and is anticipating a gradual back-up in rates as economic growth slows and inflation trends (slightly) north.

American United Life has been putting new cash flows to work in heavily structured CMOs to get the duration they need to meet their asset and liability needs, according to portfolio manager Kent Adams in Indianapolis. Adams, who oversees the firms $4.7 billion fixed-income account for its insurance company parent, particularly likes NAS (non-accelerated senior) bonds, especially the AA tranches, for their stable prepayment and extension characteristics. This paper is crafted from whole-loan Jumbo (mortgages issued in amounts greater than $272,000) CMOs and Adams says that he is drawn to it because of the attractive spread levels they offer, usually 170-200 basis points off the curve. Moreover, Adams says that with some seasoning, these bonds can often receive ratings upgrades, and tighten a further 25 basis points. Adams also has been buying RELO bonds, or CMOs carved from mortgages issued to people who relocate frequently. While he acknowledges that the prepayment speeds are high, they are consistently stable and the bonds pose little threat of extension risk. Adams has been buying them at up to 200 basis points off the curve.

Hyperion Capital Management is looking at rotating $100 million from U.S. corporates to ABS for over the next two quarters, as soon as corporate spreads go back to more normal historical levels against swaps, says Dominick Bonnano, portfolio manager with the New York-based investment firm. He sees this as being perhaps an additional 20-30 basis point further in along the five-10 year swap curve, but would not speculate as to when this might occur, other than to say it will happen in the next two quarters.

Code red! One trader made a clever play on words last week when asked to describe a plunging credit. Dealers are routinely asked to give "color" on a deal, and many usually go into a synopsis of the credit's history or reputation. This dealer cut right to the chase and gave the credit real color. "Red," he replied. "Just flashing red."

Joe Carson, a sellside economist for nearly two decades, most recently at UBS Warburg prior to its merger with PaineWebber, has joined Alliance Capital Management in New York. As U.S. economist, Carson reports to Selig Sechzer, head of fixed-income economic and risk research in New York. Sechzer describes Carson's duties as "working on a real-time basis with our traders and portfolio managers," as well as putting out a weekly piece for internal use. Carson, who joined two weeks ago, would not comment on his appointment.

Bank of America's $150 million credit for apparel retailer Ann Taylor is reportedly oversubscribed after two weeks in the market, said bankers, who noted the credit is supposed to close early next week. CIT Group and Transamerica have reportedly come in with commitments on the credit as well as co-syndication agents J.P. Morgan Chase and First Union and documentation agent FleetBoston Financial. Fees are 25 basis points for $30 million commitments, 20 basis points for $20 million commitments, and 10 basis points for $10 million commitments.

Bayou Steel signed a $50 million revolving credit facility with Congress Financial Corp., replacing a $40 million deal that was due to expire this month. The new deal provides liquidity for a company with negative cash flow, said Richard Gonzalez, cfo. "The facility is larger because we have inventory and receivables to support that. We went for more money to give us more flexibility," he said. Bayou Steel, based in LaPlace, La., operates a steel mill and a stocking warehouse on the Mississippi River.

Flowers Foods is looking for a flex down in pricing on the company's $150 million "B" tranche, but institutional buyers said they would have to reconsider their commitments to the credit if the company succeeds in getting lead arranger Deutsche Bank to make the move. The $380 million credit launched two weeks ago and was reportedly three times oversubscribed in one day. The bank's easy sell to a market hungry for food credits--especially well priced BBB-/Ba2s--caught the attention of James Woodward, cfo at Flowers. "We are asking them to reduce pricing," said Woodward, declining to comment on Deutsche's response or to elaborate more fully regarding possible structural changes to the deal. He explained that such a frenzy for the deal may mean shaving off 25 basis points may not reduce fervor among investors.

Buysiders got their wish for more "B" debt on the DaVita, Inc. deal as Credit Susisse First Boston and Bank of America upsized the $175 million "B" piece to $200 million, downsizing the $175 million revolver to $150 million and the original $75 million term "A" to $50 million. Buysiders had been clamoring for an increase to the "B' tranche (www.loanmarketweek.com , 4/6). But with the change investors in the oversubscribed "B" piece will now only receive LIBOR plus 23/ 4% rather than the original price of LIBOR plus 33/ 4%, as the pricing flexed down. Rich Whitney, cfo, did not return calls.

Deutsche Bank has reportedly received $200 million in commitments for the $325 million pro rata piece of its $475 million senior secured deal for Manitowoc Company, Inc. French bank, Natexis Banque Populaire, Bank of New York, First Star and State Bank of India, are among the syndicate, noted a banker. Commitments of $25 million and $15 million to the pro rata receive upfront fees of 62.5 basis points and 37.5 basis points respectively. Carl Laurino, assistant treasurer at Manitowoc, could not be reached for comment by press time. The "B" tranche was three times oversubscribed and pricing flexed down by 25 basis points to LIBOR plus 2 7/ 8%.

Market pros are explaining the ballooning spreads on WorldCom bonds over the last several weeks as a reaction to the expectation it will announce a big ticket bond offering of as much as $10 billion, perhaps as soon as this week. They expect the company to try to take advantage of what observers say was last week's generally positive earnings announcement, and what has lately been a positive climate for high-grade telecom paper. Though outstanding credits have taken a beating already, players expect spreads to widen further once the new deal finally comes to market.

The Federal Reserve is getting industry requests to nail down a specific point in time--preferably soon--when it will reconsider its merchant banking capital rule. Under the rule banks would have to hold capital on a sliding scale linked to the amount of its equity investments. On April 16 the Securities Industry Association "strongly urged the agencies to set a specific date by which they will re-examine the need for these external capital charges." SIA, which has a commercial bank as well as Wall Street members, would prefer that bank internal models determine how much capital should be allocated to cover merchant banking risks.