Before diving into a discussion on 'Swaptions', let's explain...

Before diving into a discussion on 'Swaptions', let's explain the term. 'Swaptions' are options on interest-rate swaps and a way to hedge (or out and out bet on) expected moves in treasuries. UBS says Options on Two-Year Interest-Rate Swaps are `Expensive'. BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? ', let's explain the term. 'Swaptions' are options on interest-rate swaps and a way to hedge (or out and out bet on) expected moves in treasuries. Options on two-year interest rate swaps are 'expensive' relative to those for longer maturities and will cheapen in the next year because turmoil in global credit markets will ease, according to UBS AG. UBS strategists recommend selling so-called 1y2y swaptions and buying 1y10y swaptions. The strategy is a bet normalized volatility will fall on the 1y2y swaptions more quickly than it does on the 1y10y over the next year. I have to wonder what's in this recommendation for UBS? Are they caught on the wrong end of swaptions just as Bear Stearns (BSC) was caught looking the wrong way on mortgages? Citigroup Inc., the largest U. S. bank, stopped accepting new clients in a unit that offers credit lines to mortgage banks, according to two people familiar with the situation. Other warehouse lenders are refusing new clients, in part because they're finding it 'too difficult to determine the financial condition' of the companies, WarehouseOne President Gary Hoyer said in an interview. Though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper. The investment vehicles, known as 'conduits' and SIVs, are designed to operate separately from the banks and off their balance sheets. Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission. appeared on Citigroup's corporate filings. In addition Citigroup (C) as well as JPMorgan Chase (JPM), Lehman (LEH), and Bear Stearns (BSC) are all stuck with LBO commitments that the debt markets are now unwilling to fund. This is bound to start a new dance craze I call hedge funds, pension plans, mortgage lenders, and possibly even banks carted out in a wagon wishing they never heard the term 'swap', 'swaption', 'conduit', 'MBS', 'CDO', 'CDS' 'SIV', 'Mark to Market' and probably a dozen others terms as well. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.