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Levels for five-year protection on International Paper tightened early last week, despite the company's announcement on March 29 that first quarter earnings would be lower than previously projected.

J.P. Morgan is ramping up its Japanese structured credit business to meet increased demand. To spearhead this effort, the bank has hired Mahesh Bulchandani, director and head of collateralized bond and loan obligations at Merrill Lynch in London, to head the business from Tokyo. Part of his mandate is to double headcount for the business to 12, said Jonathan Laredo, head of structured finance for Europe and Asia at J.P. Morgan in London. The group deals with both cash and synthetic products.

Investors bought two- and three-month Aussie dollar calls against the U.S. dollar last week, struck slightly out-of-the-money. The moves followed Wednesday's 50 basis point rate cut from the Reserve Bank of Australia. Over the course of the week, the Aussie dollar rose to USD0.488 from all time-record lows of about USD0.4775 the previous week, according to an options trader in New York. With the cut in interest rates and the Aussie dollar slowly crawling out of the cellar, one-month vol last week fell about a percentage point, hovering around 16% as DW went to press last Thursday.

Lehman Brothers is recommending clients enter bullish sterling call spreads and buy sterling knockout calls against the yen. Anne Sanciaume, foreign exchange options strategist in London, said the bank expects sterling to appreciate to JPY200 by year-end. Political pressure in Japan for a weak yen is mounting, according to Giovanni Pillitteri, foreign exchange strategist in London. Players there are looking for an export-led recovery, he added. While the yen is weakening against a broad array of currencies, the interest-rate differential between sterling and yen is higher than the interest-rate differential between the U.S. dollar and the yen, or the euro and the yen.

One-month risk reversals in the euro against the dollar switched to favor euro calls last week after the common currency appreciated against the greenback. Risk reversals moved to 0.2 in favor of euro calls on Wednesday from 0.7 in favor euro puts the previous week. The trading was mainly on the back of a rising euro--traders said that as the common currency crawled past USD0.90 on Wednesday, proprietary traders and hedge funds started buying 25-delta euro calls. Typically notionals were USD10-15 million. One-month implied volatility rose to 13.4% Wednesday from 12.95% the previous Wednesday as demand for options increased.

Federal Reserve Board easing, coupled with the rich valuations of mortgage-backed securities, has led Delaware Investments to shift into the corporate sector, according to portfolio manager Stephen Cianci. The Philadelphia-based fund has recently purchased over $400 million in corporate bonds, primarily in the single-A to BBB sector, on the view that the Fed's easing is creating a positive environment for credit products. Cianci characterizes his choices as heavily yield driven, with an average yield of 7%. He favors the energy and telecom sectors, because of the high-yield potential contained in these industries, but declined to give further details on corporate holdings.

Inflation-indexed bonds, as well as callable agency securities, are where Trevor, Stewart, Burton & Jacobson has been putting new money to work, given both the recent rally in bonds and the firm's bearish bond view going forward, according to portfolio manager Alan Kral. He has been buying callable agencies--Freddie Mac orFannie Mae bonds that are callable after a certain period of time has expired, usually two years--as a yield play. He has been picking up upper investment grade spreads on short maturity paper without sacrificing credit quality. On a called bond, he typically can receive 125 basis points above AAA commercial paper, allowing him a 5.9-5.95% current yield. On bonds the agencies do not, or can't, exercise their right to call, he gets 80-90 basis points to the 10-year Treasury bond, or a 5.80% current yield.

Financial Counselors plans on shortening the duration on its agency allocation, and will probably increase exposure to investment-grade financial sector corporate debt. Portfolio manager Peter Greig, who runs some $1.2 billion in taxable fixed income, is waiting for a retest of $106 on 30-year T-bond futures before selling 10-year treasuries to shorten the overall duration of his portfolio. He plans on making the move because he feels the short end of the curve is overpriced.

Moore Capital, the $9.4 billion New York-based hedge fund run by Louis Bacon, has hired Richard Furst, head of distressed credit sales, trading and research at Banc of America Securities, to start up a distressed bond trading book. Furst, who started at Moore early last week, says he is responsible for trading distressed bonds across all sectors at the fund manager. He reports to firm President Elaine Crocker, who was traveling and did not return calls. Furst declined comment as to whether he was the first of several hires in this area, and whether Moore would be making a push in this area.

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.

Merrill Lynch Asset Management will be rotating $300 million from treasuries into MBS contingent upon favorable prepayment reports from the agencies, as well as possible interest-rate moves, says portfolio manager Christopher Ayoub.