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Traders bought one- and two-month 25-delta out-of-the-money Aussie dollar puts against the U.S. dollar last week, betting that the currency would weaken. One-month implied volatility stood at 14.3%/14.6% at the close of trading on Thursday. Risk reversals favored puts over calls by 0.4%. The Aussie dollar was expected to weaken against the U.S. dollar because of weaker-than-expected Australia Bureau of Statistics unemployment data published on Thursday. Although employment figures improved, full-time employment had actually fallen, representing an actual weakening in the labor market, said a trader. Traders also expect one-month implied volatility to rise if the Aussie dollar falls further, making buying puts more attractive still, the trader said. On Thursday the spot stood at AUD0.5552 compared with AUD0.5565 the previous Thursday, he said. Most trades were interbank and speculative, he said. Typical notional sizes were AUD50 million.

Traders sold at-the-money Thai baht straddles against the U.S. dollar last week in a bid to offload falling implied volatility. One-month implied volatility had dropped by Tuesday to 9.5%/10.5%, from about 10.5%/11.5% the previous Friday, said a trader in Singapore. Vol fell after Thai general elections over the week-end proved to be peaceful. The spot market was similarly assuaged. Traders, led by a few large U.S. banks, were mainly selling one-month volatility on Monday. By Tuesday the selling was frenzied in maturities out to a year. Similar trading patterns were evident in the Taiwan dollar and Korean won against the U.S. dollar, as these currencies tend to move together, he said. The spot stood at THB43.10 on Tuesday, compared to THB42.15 just before the Thai elections, said the trader. Most plays were likely speculative, he said. Notionals averaged USD5-20 million, he said.

Abbey National Asset Managers is considering making its debut in the hedge fund market with the launch of three funds that will user over-the-counter derivatives. The funds would likely each launch with some GBP100-150 million (USD149-223 million) in assets. It would launch the funds only if they each could be expected to grow to USD750 million within three years. "We're not doing this to playact," said Scott Jamieson, head of strategy in Glasgow. The board of directors must still grant approval, and the decision will include factors such as whether hedge funds fit the risk levels Abbey National is comfortable with. The timing of this decision is not certain, but will likely be in the next several months. If approved, the fund strategies will include a leveraged currency fund, a global macro fund—"That's a euphemism for, ‘we can invest in anything we want,'" Jamieson quipped—and an unleveraged European long-short market neutral equity fund.

Taiwan's Securities and Futures Commission is gearing up to allow local securities houses to market interest-rate swaps for the first time within a couple of months. The move is welcomed by Taiwan's two largest securities houses, Yuan Ta Securities Co. and Grand Cathay Securities Co., which are keen to become market makers in the product, leveraging off their corporate business. Currently only foreign and local banks are allowed to offer interest-rate swaps. An official at the SFC in Taipei said it wanted to help develop and deepen the local bond market and to help local securities houses compete better with foreign banks, which dominate the interest-rate swap market. The SFC is also responding to lobbying by securities houses which have repeatedly pressed it to give them approval. He declined to comment further on the timing of the move. Senior SFC officials are now on the verge of signing proposals on how the market could be regulated, he said, declining to elaborate. They were drawn up by the SFC's over-the-counter derivatives department.

MONY Life Insurance will be adding selectively in the near term to its energy sector, specifically natural gas, on the view this sector could tighten another 10 to 15 basis points versus the overall corporate market. Only now is the Street beginning to see increases in free cash flow from companies that in the past de-leveraged themselves, so quarter over quarter there have been some dramatic earnings increases in this sector, says New York-based Mike Dineen, who manages $575 million in a total return corporate portfolio. Dineen, who has added to his Alberta Energy (Baa1/BBB+) exposure, also purchased Gulf Canada's 71/8% notes of '11 (Baa3/BB-). He bought into the 30-year tranche of last week's $1.5 billion Viacom offering (A3/BBB+), and also bought the high single A-rated Unilever's 71/8% notes of '10. "We are using our cash build-up to be more proactive" in the primary market because it remains difficult to do swaps in the secondary market, says Dineen. There are many cash buyers for the new issue market leaving little incentive for dealers to do swaps and also, as dealers minimize risk by holding inventory, they have little reason to bid paper. The portfolio, which is neutral to the benchmark Lehman Brothers Corporate Intermediate Index with a duration of 3.65 years, is 66% investment grade corporates, 20% asset-backed securities and mortgage-backed securities and 14% cash.

Source: Thomson Financial/Securities Data. For more information, call Rich Peterson at (973) 645-9701. BP SPRD. - basis point spread over Treasuries; FLT. SPRD. - basis point spread over floating index; Comb. - fee is combined; NR - not rated; Na - not available; n 144A // Manager responsible for running the books; Contains offerings of $2 million or more and includes only the portion of global deals distributed in the U.S.; * More managers, but not listed; JB - joint books; Ý estimated price.

James Investment Research is moving out of Treasuries and into MBS, as well as some non-callable agencies, on the view that the former have priced in too much good news and the latter could see spread-tightening as investors seek quality. Barry James, a senior portfolio manager for some $200 million in taxable fixed income, says MBS and agencies could tighten this year 50-100 basis points and 25-75 basis points, respectively. Treasuries may have over-rallied, now that it appears the budget surplus may not be as large as once anticipated. He says he may boost his MBS allocation from 10% of the total portfolio to 15-20% and the agency allocation by perhaps only a few percentage points by selling five- to 10-year Treasuries and buying MBS with maturities of 10 years or more, such as 30-year Ginnie Mae 61/2%s. Keeping to lower coupons such as this will also help protect him from the expected boom in refinancing. James says if he sees a pullback in rates of 25-30 basis points he would look to extend duration out to about six years from its current 5.5 years via the Treasuries-MBS swap. The duration of the portfolio's benchmark, the Lehman Brothers Government/Credit Index, is 5.54 years. The Alpha, Ohio-based firm's portfolio is allocated 46% to Treasuries, 36% to agencies, 10% to MBS and 8% to corporates.

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. This information is based on sources which we believe to be reliable but has not been independently verified. Accordingly, Citibank/Salomon Smith Barney and its affiliates do not assume responsibility for, and do not make representations or warranties (express or implied) as to the accuracy of the information. This information sheet does not constitute an offer to sell or a solicitation of an offer to purchase any securities or other instruments described herein.

Some European industrial junk credits are now trading above par while others remain in the high 80s and 90s, a disparity that has high-yield pros disagreeing about whether credit issues or technical factors are driving the prices. "It is all technical," argues David Newman, high-yield research analyst for Salomon Smith Barney in London. He points to the fact mutual bond fund inflows into the U.K. market hit $644 million for last week. With few new issues, those flows tend to head toward recognized names. "There are the largest inflows since June, 2000," he adds. Credits such as Alfa Laval, Grohe Holding, Ineos Acrylic and William Hill are trading around 106, while BSN Financing and Isco .are in the low-90s. Frank Ferrantelli, head trader for CIBC World Markets in London, sees the trading opportunities, as does Newman, who believes the reason for the trading disparity is because investors are flocking to familiar names in reaction to the volatile fourth quarter of last year. He points out that the similarly rated Premier Foods' 12 1/4% notes of '09 (B3/B-) is yielding 13.9% while William Hill's 10 5/8% notes of '08 is yielding 9.75%. "Why not sell William Hill and buy Premier, taking out 12 points of money and a downward yield of 430 basis points?"

Recent corporate spread tightening following the Fed funds rate cut is being touted by some market players as indicative of a mature market where investors are able to anticipate events months before they happen. In the mid-1990s the lag effect between the positively correlated Fed funds rate and corporate spreads could be as much as two years. But market reaction to the Fed's recent 50 basis points of easing immediately tightened spreads 20-40 basis points, says John Kollar, corporate strategist at HSBC Securities in New York. "[This is a] structural change associated with a more mature corporate bond market," he adds. Milton Ezrati, strategist and economist at Lord, Abbett & Co. in New York, agrees the corporate market has matured, but unlike Kollar, he considers the speed with which spreads narrowed just a sigh of relief from a market heavily apprehensive of a slowing economy and a looming recession. "The market was in the midst of a near panic when the Fed eased," says Ezrati.

After selling $70 million in mortgage pass-throughs to buy five and 10-year Treasuries six weeks ago, the United Bank of Kuwait Asset Management is considering reversing the trade and selling Treasury paper to beef up its MBS exposure by $40 million. Mortgage pass-throughs have cheapened as investors have become worried about prepayments, says Robert Friend, portfolio manager of $1 billion worth of taxable fixed income in London. He adds MBS is lagging behind 5- and 10-year swap spreads and represents an historically good value. The yield curve manager is 5% long its duration relative to the J.P. Morgan Global Bond Index, which has a duration of 5.8 years. Friend is slightly bearish and will neutralize the duration once Treasuries trade up about 5 basis points, giving the 10-year a yield of 5.06%. "We need discipline, because if yields back up because the market gets ahead of the economy, we don't want to have to give back all the profits we've made off of being long," says Friend. Seventy-five percent of the portfolio consists of government paper, including Canada, Australia, Japan and Europe, with 20% in U.S. agencies and the remaining 5% in investment grade corporates.

Up-front fees on pro rata tranches ticked down slightly but are still within arm's reach of last year's annual high of 4.2 basis points. According to Portfolio Management Data, for the rolling three months ended Dec. 31, 2000 pro rata fees tip-toed down to 4.0 basis points for every one million dollars committed. Fees on institutional pieces remained steady at 2.3 basis points, which was the same for last November (LMW, 11/13/00). Marc Auerbach, associate at PMD in New York, said not much has changed in the dreary, credit-sensitive loan market. "The story is much the same. There's not a large deal volume," explained Auerbach. He added that leveraged deal volume for December wilted down to $19 million from November's $36 million. He attributed the small dip in fees to a handful of richly priced telecom deals missing the three-month radar. "It's a rolling three-month average, so some of the small, highly leveraged telecom deals have dropped off our average, which probably accounts for the slight down-tick. Small, leveraged pro rata deals are what's keeping the spreads up," explained Auerbach. One such deal is Goldman Sachs' $250 million credit for Network Plus. The Quincy, Mass.-based telecom company paid 61/2% over LIBOR to expand its network back in October last year.