COMMENTS

EUR SWAPS
Flow of the day was large and consistent paying of 2s and 3s as they were
paid in blocks of 250-500mm throughout the course of the session. This had
the effect of flattening 2/10s by an impressive 8bps and of widening swap
spreads by about 0.75bps in that part of the curve while spreads elsewhere
closed the day pretty much unchanged. Further out the curve, we saw strong
interest in the 5/10 spread though it's unclear if this was new risk or
profit taking from the dealer community. With regard to spreads, I'm
wondering if it makes sense to put on a swap spread widener here with a very
short term view. Swap spreads blew out in the US yday as the market got the
sense that most of the new issuance was out of the way and given how well
EUR spreads held in despite yday's Singtel, ATT, and EIB pricing, perhaps
EUR spreads are due for a small correction. Still like the narrower longer
term, just thinking on a very short term basis.

WHY THE FED WILL BE SLOW TO TIGHTEN
In our view the econ recovery is not likely to be very powerful. There are
large imbalances in the household and corporate sectors and the sources of
stimulus (mortgage financing, etc) are likely to be much less than
previously expected. Additionally, while it is true the nominal rates have
fallen sharply, the decline in real rates is roughly half of the decline in
nominals. On the inflation front, we believe inflation is likely to decline
further as a consequence of both excess capacity and higher unemployment.
With most major indices at 2.5% or lower, the Fed can be much more patient
than normal when they consider whether or not they need to take back some of
the 450bps of easing. Overall, we believe the Fed will want the econ to grow
at an above trend rate in order to psh it back to full employment but
against this we have a market that is now incorporating a signif amount of
tightening over the next near (Dec Euro$ up 90bps in the last week). Even
building in a risk premium of 10bps per contract, a 25bp sprd between 3m
libor and fed funds, and 15bps of year end pressure, this still implies
about 100bps of tightening by 2003. While not impossible, it neither
reflects the Fed's thinking nor appears anywhere close to the center of our
probability distrubtion.

USD SWAPS/VOL
Another 3 standard deviation event yday, with the sell-off in treasuries
snowballing as negatively convex portfolios capitulated into selling by
paying fixed at higher rates. The cork was finally removed from the
pressurized bottle in spreads - with most corporate deals out of the way -
and took their natural course by widening by 5bps. We saw heavy flows, with
paying across all sectors, save the very long end.

Vols were up on the day. Gamma shot up 0.5bps/day, which is a pretty large
move; longer expiries were up about 0.2bps/day, which is in line with the
market price of skew. Flows were not as heavy as one might have expected; at
least for the time being.

The market is clearly saying that this is the turn in the economy, and that
we're already heading for a sharp recovery, with aggressive Fed tightening
action over 2002. This seems to be somewhat premature. With no inflation in
sight, and still big signs of weakness in the economy, it is unlikely that
the Fed will reverse its course this fast. Whilst this sell-off might not be
over in the near term, (expect high volatility), we remain constructive on
the outlook for rates in the medium term.

IPOs & CORPORATE ISSUANCE
Both the coporate bond market and the equity IPO market seem to be
recovering a bit here. The avg spread tightening on the 3 Sing Tel and
4-fixed rate ATT tranches is 19bps between where the deal was priced yday
and where it opened this morning. On the equity side, not only are our sec
lending people telling us that short interest is decreasing (ie more pple
covering shorts), but IPO calendar is also firming up. The US market had its
busiest week of the year with 5 IPOS & 15 secondary offerings and can look
forward to the $3bln Prudential next month while Europe pitched in with a
$3bln convert deal for Swiss Re and expects some $9bln in new issuance by
the end of the year. While it's unclear how much underwater portfolios will
look to take on new posns going into year end and while this flood of
issuance may simply be due issuers looking to tie up loose ends before year
end, it does appear the global investor base is becoming a bit more
receptive to new deals. 

LEVELS (close to close, ex basis)

SWAP CURVE
GBP/EUR(EUR convention)
	      today 	  t-1
5y5y		 -25		 -25 
15y15y	 -144		 -142
10/30?	 -39.0	 -37.5 
10/30E       +44.8	 +46.0	 

EUR SWAP SPREADS
5y:  Bobl 138	26.7 	unch
10y: Jan 11 bund	33.8  unch
30y: Jan 31 bund	21.6	0.2 wider

GBP SWAP SPREADS
5y:	8h Dec 05   52.0  2.0 narrower
10y:	9 Sep 11	48.0	2.0 narrower
30y:	6 Dec 28	35.0	unch

EUR SWAP VOLATILITY
3m into 10yr	13.9 	unch
1y into 10yr	12.6 	0.3 lower
2y into 10y		12.3 	0.2 lower
5y into 5y		12.1	unch
5y into 25y		10.1	0.2 lower	
10y into 20y	9.4	0.2 lower
5y5y swaption/5x10 cap spread	2.3


SCHATZ BASIS TO DEC 
Bko 3.75% Sep 03	12.0 gross bid,1.40% repo offer,0.0 net
Dbr 6% Sep 03	20.0 gross bid,1.85% repo offer,-0.9 net
Tha 6% Nov 03	37.0 gross bid,3.15% repo offer,23.2 net

BOBL BASIS TO DEC
Obl 138	7.8 gross bid,	2.50%	repo offer,	  -1.7 net
Jan 07	39.0 gross bid,	3.15% repo offer,   26.7 net 

BUND BASIS TO DEC
5.25% July 10	11.5 gross bid,2.20% repo offer,-3.4 net
5.25% Jan 11	57.0 gross bid,3.20% repo offer,48.4 net


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