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European government notes are on their steepest drop in a week. The notes have been on the decline for nearly two months now, and came after the declaration made by European Central Bank President Jean-Claude Trichet to the effect that there may be a hike in interest rates next month to combat inflation.

The notes’ decline has moved two-year rate-sensitive yields beyond that of 10-year German bund yields. This was a first in a span of one year that has in a way inverted what is called yield curve, after a statement by Trichet on the “heightened alertness” state of policy makers on inflation. The European Central Bank’s main refinancing rate has held within 4 percent in June 5, which was exactly what was predicted by analysts.

Climbing 33 basis points, the two-year note escalated to 4.65 percent, the most its ever done counting from April 18. Meanwhile, the note due March 2010 has declined 3 percent in value to 0.50, or 5 euros to every 1,000-euro, which is approximately $1,560 at face value to 97.28.

For quite some time, we can expect the inverted yield curve to remain. As the European Central Bank moves toward another round of tightening cycle the market braces for a couple of hikes in 2008.

There has been a rise in cost of shielding corporate bonds from default with the surge in the rate of unemployment coupled by the increase in oil prices, which has now gone beyond $139 per barrel, fueling concerns that the ailing US economy will worsen still.

On benchmark indexes, credit-default swaps increased, which was its fourth for the week, as it hikes the cost of debt protection costs to nearly two-month high. Contracts that are linked to American International Group Inc. have risen on hunch that that US regulators are scrutinizing company credit swaps accounting connected with subprime mortgages. The cost of shielding bank debt also increased, which was led by some of the most prestigious financial institutions such as Lehman Brothers Holdings Inc. and Wachovia Corp.

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There is a growing concern regarding the discouraging payrolls reports, for five months in a row now, might trigger a series of corporate defaults, aggravated further by surging materials and fuel costs plus strained bank balance sheets.

“This is a sign of real softness in the labor market. There are forces at work - oil prices, housing prices, difficulty getting a job when you have been laid off and the credit crunch - that are going to make things worse,” according to chief US economist Roger Kubarych, Unicredit Global Research.

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With the increase in the number of projected hurricanes this year, investors can profit from them, if they purchase credit-default protection, according to Barclays Capital analysts.

There are markets for two years damage claims for property and casualty insurers for relatively light hurricane, the advisers said.

For this year, meteorologists have predicted a greater than average number of hurricanes as well as an increased probability that a storm of major magnitude will hit the United States. This is how investors can make a profit:

• On the three insurers, purchase credit-default swaps
• fund the trade. You can do this by selling contracts on certain insurers (they must have less exposure to the hazard although they’re in a region prone to storms) or you can get them sold on a benchmark index.

The contracts could easily yield 15 to 20 basis points increase, the analysts added.

Credit-default swaps are financial instruments. These instruments are based on bonds and loans that are utilized as speculative tools as regards a certain company’s ability to make good its debts. They were first and foremost designed to shield bondholders in case of default. In effect, these instruments pay the buyer at face value in return for the underlying securities in the event that the company should fail to comply with debt agreements.

It’s a great opportunity for investors to grab and take advantage of the credit markets’ volatility as the looming threat of storm activity increases. Remember that these are all based on predictions, but if a major storm does in fact happen, the contracts could go wider even more.

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Investors of auction-rate securities were unable to get their money ever since the market sometime in February seized up.

This is exactly what happened to real estate investor Franklin Biddar, 65, from Toms River, New Jersey, who was unable to get hold of the cash that was invested for him. Even when he tried to sell securities that was worth $100,000 to Fieldstone Capital Group, Charlote, he could not unlock his money on the grounds, said North Carolina-based Bank of America, that the transaction was not made in his behalf. In other words, he was not privy to the instrument and his money got tied up in an investment that would not redound to his benefit.

Although Biddar said that he was willing to accept payment that’s 11 percent less than what he originally invested in the securities. He claimed that it was Bank of America who got him into the said securities in the first place, and that now they won’t allow him to get his money.

Several financial institutions such as the Bank of America, UBS AG, and Wachovia Corp. plus at least some 48 other firms sold $330 billion worth of these securities have thwarted all attempts to create a secondary market that can grant investors access to their money. However, the dealers say that they are sparing their customers from unnecessary securities losses marketed as similar to cash-like instruments.

Since mid-March, there have been at least 24 filings for proposed class action lawsuits versus brokerages regarding claims that investors were misled to believe that the securities were nearly as good as cash.

Some of the investors that were trapped in this deal are prominent entities: Google Inc. in Mountain View, California. The investors have been trapped in auction-rate bonds for longer than three months after the dealers suddenly stopped running the bidding and abandoned the market with their mounting losses on debt connected to subprime mortgages. Earlier however, the same dealers were buying securities that went unsold, and routinely told investors that at a moment’s notice they could get their money back.

“For someone needing their cash, the only choice is to go to the secondary market and sell them with a haircut. I don’t think brokerage firms have any interest in selling these,” according to lawyer Steven Caruso, at Maddox Hargett & Caruso, New York, who represents investors versus dealers.

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Recently US stocks, in nearly two months, surged the most. This was led by both energy and retail companies, on speculation of an oil price increase to $5 per barrel and Wal-Mart Stores Inc. as well as Costco Wholesale Corp. sales that exceeded analysts’ forecasts.

The gains have made the Dow Jones Industrial Average gain up to 214 points and were responsible for the tremendous rise to its highest ever, since January 3, in Nasdaq Composite Index as it closed. Exxon Mobil Corp. has posted huge gains as it led energy shares to their highest leap counting from March boosted by a weaker dollar.

Wal-Mart is on a four-year high climb, while Costco, in 11 weeks in a row, realized huge gains.

Rallying the most in five years, Verizon Communications Inc. has become the largest mobile communications company in the United States after the firm’s wireless unit agreed to purchase Alltel Corp. in a $28.1 billion deal.

According to experts, despite the fact that the economic conditions look bleak, things aren’t really that bad, since there are still some glimmer of hopes as the market from time to time breathes a “sigh of relief.”

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Asian oil producers and US sales-reliant Japanese companies led the recent Asian stocks advance. This occurred right after prices of crude oil surged to record high in two months while the yen succumbed to the US currency in a three-month low.

Mining company BHP Billiton Ltd. (the world’s biggest), and oil explorer Inpex Holdings Inc. (the largest Japanese oil explorer) gained. JFE Holdings Inc. emerged ahead of all the other steelmakers following the time when Nucor Corp. posted huge second-quarter profit due to increase demand worldwide. Getting approximately 50 percent of its sales from North America, Honda Motor Co., surged in Tokyo on bets that a weaker Japanese currency will boost the sales value in the United States.

Japan, being an export oriented economy, can take advantage of a weaker yen and gain in currency exchange.

The recent gains have indeed helped the benchmark index, which hardly changed through the end of May, get rid of earlier losses to surge 0.1 percent.

“Behind the rising oil price is the resilient global economy, driven by emerging countries. The current exchange rate is weak enough to relieve investors’ concern a stronger yen will erode company earnings,” according to senior strategist Yoshinori Nagano, Daiwa Asset Management Co., Tokyo.

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Early next week, the Lehman Brothers Holdings Inc. may raise up to $5 billion in capital. The company, which is the fourth-largest securities firm in the United States, from the time it went public in 1994, may yet report its first ever quarterly loss, according to a company insider.

There is an overseas investor and one US pension fund, at the very least, that Lehman executives are talking with as regards the terms of a transaction. However, a rights offering, wherein existing stockholders can have the right to buy discounted shares, is not part of the present plan.

This year, Lehman plunged by 48 percent in New York Stock Exchange as the company deals with problems regarding the decline of the mortgage as well as structured credit business.

Amid low real estate-backed debt securities and high-yield loans demands. The securities firm is doing its utmost to minimize leverage, or the assets versus shareholder equity ratio

In April, Lehman was able to come up with $4 billion from a sale of convertible preferred shares. This was done to weed out speculation that the company was dire need of capital. By issuing subordinated bonds and some other kinds of securities, the securities company, all in all, was able to raise $8 billion.

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Royal Ahold NV, which is based in Amsterdam, realized an unexpected profit during the first quarter as it raised operating margin target for the full year following a Dutch chain’s sale, according to owner of Albert Heijn.

The company realized an 8.9 percent in net income that translates to 258 million euros or approximately US$402 million, which further translates to 22 cents per share, from the previous year’s 237 million euros, or 15 cents, the company said, as it exceeds the 224 million-euro median expert estimates.

The company during the past has spent as much as $19 billion on takeovers. However, this activity came to an abrupt stop when Ahold, in 2003, got involved in an accounting scandal. Currently the company has sold assets in order lift company earnings, as it puts more effort on retailing.

The profit realized by the company soared as this giant grocery chain enticed its customers its prepared meals, helping counteract declining US earnings, where the company busied itself with its price-cutting spree in order to compete with another entity called Supervalu Inc.’s Shaw’s chain despite the turbulent economic conditions.

Petercam analyst Fernand de Boer, in Amsterdam, who gave Ahold a “buy” rating on company stock said “[i]t’s positive that Ahold raised its margin target even though the situation in the U.S. is getting tougher.”

Some say that Asset Dedication is the new Asset Allocation. According to Stephen J. Huxley and J. Brent Burns, asset dedication was the result of the evolution of asset allocation. It is meant to end the procrustean approach in classifying the investment profiles and approaches of every client or investor.

Brokerage firms usually classify investors as “Aggressive”, “Moderate”, or “Conservative”. After classifying which character the investor is, a recommended blend of XYZ is now put into play. But how sure are we that this investor has the proper blend of stocks, bonds, and cash?

Asset Dedication could be completely described as a case where patients visits their respective optometrists. Optometrists, after doing some testing procedures, will give you your same eye sight reading. Unlike brokerage firms who have their own investment questionnaires aimed at providing you with the right mix of stocks, bonds, and cash, they will, I personally doubt, give you the same blend of XYZ.

Amid investors’ opposition, France Telecom SA has made an offer to buy TeliaSonera AB. The said offer was for 252.5 billion kronor or approximately US$42 billion. The reason investors are opposed to this deal is that it would simply erode value.

During the previous month, approximately 9 out of 10 investors were openly against the deal between these two telecommunications companies as they could not see any real advantage to the merger, whether financial or strategic.

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TeliaSonera and the Swedish government have jointly rejected France Telecom’s bid and in effect saying that the offer is not high enough. The Swedish company therefore is open to better offers.

France Telecom claims that the merger would have created the largest telephone company in Europe. That it has the potential of increasing customers by as much as 39 percent or 237 million that could save both companies nearly 700 million euros per year by 2013.

Having declined by 26 percent this year, France Telecom has recently incurred a 5.1 percent loss in Paris trading. The buy offer for TeliaSonera has hurt stock value and may continue to do so as bets regarding an increased bid abound. Recently France Telecom came out as the worst performing stock among 20 other European counterparts, while TeliaSonera shares soared 29 percent.

The deal has been labeled “a poor deal for both parties” or “a dreadful deal” by analysts.