FLOATING RATE NOTE MARKET STILL IN TURMOIL
The market in floating rate notes showed
no clear signs of recovery today from the confusion which sent
prices tumbling and paralysed trading at the end of last week,
dealers and bank officials said.
    FRN dealers said at least 10 houses did not open for
business with many market operators pausing to assess their
next steps in the wake of Friday's huge drops and panic
trading.
    Despite some late signs that prices were recovering last
week, today's erratic trade provided a similarly mixed final
picture with longer-dated FRNs still clearly under pressure.
    While FRN specialists noted that paper on which coupons are
shortly due to be refixed had managed to hold up today, as had
notes paying a relatively higher margin, longer term FRNs were
still subject to intense selling pressure.
    "Anything longer than 10 years is still being sold off
seriously, as is just about any paper in the banking sector,"
one FRN market source at a leading U.S. House said.
    He noted that one long-dated Citicorp issue -- paper which
has suffered recently on fears over Latin American debt
exposure -- slipped by two points to around 94.00. FRNs, whose
coupons are refixed regularly, usually trade around par.
    U.S. And Canadian bank paper was still generally under
pressure, as was Republic of Ireland paper, due to renewed
worries about the Irish economic situation.
    The malaise was felt through the banking sector with a two
point fall registered by one BNP note, to give a three point
drop over two trading days.
    Retail clients, usually seen returning to the market as
price falls push yield margins up to these attractive levels,
have been unnerved by the last three days' panic, dealers said.
    "Yes, there's been some bargain hunting, but no one dares to
be first to come seriously back in," said one dealer.
    "A handful of market giants have frightened the retail away
with this aggressive manipulation. As true liquidity drains, we
are going to have to see some better market cooperation and
rationalisation," commented one FRN trader now dealing with
straight bond issues since the floater market crisis.
    This view was shared by the majority of FRN market sources
polled by Reuters since trade began to collapse last week.
    Of the 50 or so houses who have up until now made a market
in floaters, dealers estimated that around a dozen did not
quote FRN prices today and they reported that one or two houses
were not expected to resume trade in the securities at all.
    Many called meetings to assess the current market
situation.
    "Given the potential volatility of this market -- one which
has been conclusively proved by the events of the last days --
senior management are now duty bound to revise the set of
parameters within which they, as market makers, are now to
work," commented one senior source at a leading U.K. Investment
house.
    However, there were no reports that a formal crisis meeting
of market makers -- such as that called in December last year
during the perpetual FRN market collapse -- was on the cards.
    Several firms were expected to cut back drastically on the
list of FRNs traded, with most volatile paper first to go.
    Elsewhere in the eurobond market, business was extremely
quiet, with virtually no activity seen in the dollar straight
sector which has been becalmed of late, traders said.
    "There has been no real two-way business today, neither has
there been any new issues for diversion," noted one trader.
    "All we have seen today is some squaring up of positions,"
she added. Investors remain cautious of the dollar, which
though recently stable, still has potential downside risk.
    Eurosterling, the market sector which, aside from the FRNs,
has been in the headlines lately, was quiet today ahead of the
U.K. Government budget due to be announced tomorrow.
    Undertone was very firm with dealers expecting a positive
fiscal package tomorrow and, if not more good economic news to
boost sterling, at least confirmation of the bull factors which
have bolstered eurosterling and gilt-edged bonds lately.
    "It was just sit and wait today but I expect it will be full
steam ahead on Wednesday," commented one sterling market source.
    Prices showed gains to 1/8 to 3/8 point across the board.
    Dealers said several new eurosterling issues were currently
in the pipeline and an early issue is expected to be for a
major European bank which currently has a mandate in the
market.
    In other sectors, euroyen also maintained its firm tone.
    Although the market is expected to be resting until trading
switches to an April value date, the euroyen sector is expected
to be buoyed by some professional switching out of Japanese
government bonds into relatively cheaper euroyen bonds.
    Two new yen issues were features on an otherwise quiet
primary market. Both for 15 billion yen due 1992, the first for
Eksportfinans was at five pct and 103 pct, led by Mitsubishi
Finance International. The second for Export Development Corp
at 4-1/2 pct and 101-7/8 pct led by Bank of Tokyo
International.
    The day's only other feature was a targetted 30 mln dlr
stepped coupon deal for Kawasaki Steel due 1994.
 REUTER
