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Supranationals, agencies and other triple-A public sector borrowers have rushed to the dollar market en masse this year, illustrating their herd instinct when it comes to chasing arbitrage. But few can blame them as opportunities in the euro and sterling markets decline. Neil Day reports on how the search for arbitrage is forcing top quality borrowers to the extremes of the international debt markets.

Once the dog of the market, health care names, are now among the most in demand. A total of $20 million of Mariner Post Acute Network's bank debt traded in the 60 range from 56 as dealers reported continuing improvements in the health care sector. Dade Behring's debt shot up from the low 60s to 70 late last week. Lucent Technology's paper dropped from the 96 to 91.5 range this week on the failed merger with Alcatel.

Credit derivatives practitioners panned the Basel Capital Adequacy Accord in formal responses submitted to the Bank for International Settlements last week. In particular, bankers and the International Swaps and Derivatives Association criticized the accord because it would require credit derivatives trading books to be better capitalized, doesn't allow for the joint probability of default and imposes a ceiling on the amount of regulatory relief banks can claim against credit derivatives positions, known as the w-factor.

Axa Investment Managers, a Hong Kong fund management subsidiary of Axa Holdings, will launch a fund later this year that will use over-the-counter and listed equity derivatives. "The launch of our absolute return fund will require the use of derivatives," said Barbara Shaw, head of Asian equities and balanced funds. She declined to reveal specific examples of the type of derivatives or strategies it will use. Axa, which has USD4.5 billion in assets, is talking with a number of investment banks in Hong Kong.

Five-year credit default swap spreads on Alcatel narrowed to 95 basis points Wednesday from 140 bps Tuesday after the company pulled out of a proposed merger with Lucent Technologies. Proprietary traders bought credit default swaps on Alcatel as the spread widened expecting it to continue widening if the merger went through, but as the deal was called off the spread came in.

Basket options are valuable tools in structuring financial products. A typical basket consists of several weighted underlyings, and the basket spot is given by:

Enron has established a credit derivatives operation in Tokyo to manage internal exposures and to offer credit risk management to its customers. To staff the effortJean-Sebastien Fontaine, analyst, has transferred from Enron's London office and the company has hired Michael Gordon, a credit derivatives trader at Rabobank in Tokyo. Fontaine and Gordon declined comment.

One month euro/dollar implied volatility shot up to 12% Friday from 10.9% Monday after the euro depreciated against the greenback to USD0.8456 from USD0.8587. There was demand for euro calls/dollar puts from traders who feared European Central Bank intervention and traders took profit on euro puts/dollar calls they had bought when the euro was trading in the USD0.90-0.94 range. One trader said euro calls/dollar puts with maturities out to two weeks traded last week with strikes between USD0.8650-USD0.88.

HSBC Asset Management last week bought an equity basket call option to structure a three-year guaranteed fund. Mark Dickson, global head of product development in London, said the call option gives the fund equal exposure to 25 mainly health care and financial services companies in North America, Japan and Europe. The basket includes AstraZeneca, Citigroup and Yamanouchi Pharmaceutical. Dickson said it chose these companies and other components of the basket because they are expected to appreciate as a result of an increase in the percentage of elderly people in the developed world.