COMMENTS

DANISH INSURERS
As expected yday, Danish regulators reduced the discount rate used to value
insurance liabilities from 4.00% to 3.75% despite the fact that the formula
called for them to reduce the rate to as low as 3.5%. This marks yet another
meeting where the Council reduced the rate by less than what was dictated by
the formula and this likely reflects the lobbying pressure being applied by
the Danish insurance industry. The attached graph plots the discount rate
required by the formula (not the rate chosen by regulators) vs 5y5y EUR vol.
It's interesting to note that vol reached it's peak EXACTLY when the
discount rate reached its trough. It's also interesting to note how quickly
vol sold off when the discount rate rebounded from the 3.50% low (as
equities rebounded). Overall, while we suspect there will be some smaller
funds feeling some pain with this latest reduction, it's likely much less
than the forced buying that we probably would have seen if the rate was
reduced by the amount required by the formula. Going forward, it seems the
best guide to the performance of long dated vol and cash in Euroland is the
overall level of the index. Happy to provide more information on this if you
want more clarification.

 <<dkkvol.doc>> 
EUR SWAPS
One of the quietest days of the year yday as the market rallied and the
Tresor was nowhere to be seen. Will be interesting if today's weakness
brings them back into the market. Tresor aside, the focus now shifts to an
increasing corporate pipeline that will see a 750mm 5y deal from Alcatel,
and 500mm 7yr deal from Tomkins, a 5y or 7y deal from Metro, and a 500mm 10y
deal from Royal Ahold coming to the market over the next several days. With
swap spreads very close to their tightest levels of the year, we've seen
little interest in swap spread widening positions & with the Tresor looming
and issuance increasing, we suspect spreads will continue on their
tightening path for at least the balance of the week. Overall, it seems this
week will provide a very good barometer of how the rest of the year will be
from a flow perspective as there appears to be little incentive to
jeopardize yearly performance (good or bad) by committing large amounts of
capital to a market that's been particularly vicious over the past two
weeks. 

EUROPE TRADING VIEW
Our overall trading view is to buy on weakness and sell on strength this
week. Due to illiqudity and lack of risk capital commitment before year end,
and no major economic data to turn the market around, our trading strategy
this will likely be BUY AND TRADE, wait until new year, and then BUY AND
HOLD. A few other points:

*	Note that Europe and US have began to sell off at the same time.
Based on empirical studies, the simultaneous sell off usually signals a
correction, not a prolonged bear market.
*	5s in Europe have under performed very sharply relative to the
beginning of all previous bear markets.  Note that supply in that sector is
now behind us, and supply will concentrate in 10 year sector in next two
weeks.
*	Stocks, Bonds and commodities market have all thrown in the towel
for a V shape recovery.  What's the probability that all three markets are
wrong?
*	MSCI reweightings this week.  Our research estimated 4.7 billion out
of Eurozone and about 4.2 billion into UK.  However, this news is priced in
the market in our opinion.  If European fixed income sold off because of the
reweightings this week, we would fade that trade and go long European fixed
income.


LEVELS (close to close, ex basis)

SWAP CURVE
GBP/EUR(EUR convention)
	      today 	  t-1
5y5y		  -20		  -20 
15y15y	 -139 	 -141
10/30?	 -36.0	 -38.0
10/30E       +43.5	 +43.5	

GBP SWAP SPREADS 

EUR SWAP SPREADS
5y:  Bobl 138	23.5  0.5 narrower
10y: Jan 11 bund	31.9  0.7 narrower 
30y: Jan 31 bund	20.2	0.5 narrower

EUR SWAP VOLATILITY
3m into 10yr	14.9 	0.1 higher
1y into 10yr	13.5 	0.1 higher
2y into 10y		12.9 	unch
5y into 5y		13.1	0.1 higher
5y into 25y		11.0	0.1 higher	
10y into 20y	10.4	0.1 higher
5y5y swaption/5x10 cap spread	2.3


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