Concurrent to the talk of replacing U.S. Treasurys as a benchmark for asset-backed securities, ABS investors and dealers are increasingly using swaps to hedge their positions, said market sources.

"When you change your benchmark, you almost by definition change your hedge," said Louis Nees, managing director on the swap desk at Bear Stearns & Co. "We're getting an increasing number of phone calls from either investors or originators, who are more and more interested in using swaps to hedge their businesses."

Though the concept of disconnecting spread product from Treasurys is not new, the topic has regained momentum recently, reflecting the resulting volatility in Treasury yields as the Federal Reserve Bank announced a buy-back last month.

"The topic is in front of everybody's radar screen because of what happened at the end of January," said Tom Zimmerman, an analyst at PaineWebber. "The people who used to hedge against the 30-year bonds, they really got hammered. They really lost a lot of money. Anybody who was using 30-year bonds during that period just got destroyed."

January's near disaster recalled the crisis of 1998, Zimmerman said, where, in both cases, there was a very significant dislocation in the market place.

The relationship between benchmarking and hedging is a natural one, as a good benchmark will move in tandem with the security that's tied to it, Zimmerman explained.

"When it comes to deals, almost everybody's still pricing them off the Treasury market," Zimmerman said. "But independent of that, people are doing their own relative value analysis as to what's cheap and what's rich."

Like its candidacy for benchmark, swaps as a vehicle for hedging is not a new concept, but rather one that's increasingly gaining attention, said a market source.

"In the-mid 90's you had some very sophisticated guys who were using swaps to hedge their mortgage- and asset-backed positions," the source said. "You saw in the Fall of 1998, where all spread products widened in relation to Treasurys, the realization became that, hey I've got this liquid alternative to the Treasury market, and it actually captures a big part of my spread risk.'"

As corporate bond players began using the swap market to hedge themselves, which helped push spreads out, the swap dealers in general saw that spread product was rising so they pushed spreads out.

"But to me, 1998 is still the big event where people really got up and said, wow, the swap market is something that I really have to pay attention to, because the spread products I own track very closely what's going on in that market,'" the source added.

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