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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: accountclosed who wrote (832)	3/25/1999 10:44:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 2794

Antoine, You are talking about 'the turn'. You will see this effect to a lesser degree at the end of each quarter as well. You will also see it in many other currencies and is often even more pronounced. The way it is actually manifested is as a discreet rate over the end of the year. And when it it becomes included in longer term money you see it incorporated. That is why on Dec 1 you see the 1 month rate jump, it is now a rate for money from Dec 1 to Dec 31 plus the rate for money from Dec 31 to Jan 2. Obviously weekends also come into play. This year end turn can actually be traded interbank. Right now dollars over the year end turn are trading at slightly over 10% compared to mid 5s for the rest of the curve. The reason for this is actually the opposite of the one you mention. It is not additional demand for funds but less supply. Banks need to maintain certain capital and asset ratios. Quarter and year end numbers often play a big part in this analysis. Almost all big banks try to get assets off their books as the end of period approaches. One of the easiest places to cap assets is interbank. They just tighten up their interbank lending. It particularly helps if you reduce your lending to iffier credits, which in recent years has meant Japanese banks. Meanwhile there are banks that are dependant on wholesale money. They will be forced up to get the liquidity over the turn. The equilibrium rate will be reached when the rate rises enough that the lending bank can earn a high enough return on the asset to justify carrying it over the turn. So it really is more of a supply issue, demand doesn't rise significantly. It is also worth noting that the turn is a game that gets played prior to the event. On the actual day the rate is much more symetrically volatile. Depending on how banks have positioned themselves over the turn you may actually see rates collapse on the day.