June 25 (Bloomberg) -- Credit Agricole SA and Natixis SA, France's third- and fourth-biggest banks, suffered losses this month on debt securities after European Central Bank President Jean-Claude Trichet sparked a gain in short-term interest rates.
Credit Agricole's investment banking unit, Calyon, may book losses of about $300 million, said three people familiar with the situation who declined to be identified because the figures aren't public. The impact on Natixis will be ``substantially'' less than 100 million euros ($155 million), according to a spokesperson for the Paris-based bank who asked not to be named.
Trichet said on June 5 that officials may raise interest rates to fight inflation, triggering a surge in the two-year European swap rate to 5.25 percent from 4.98 percent a day earlier. The jump led to the biggest inversion in Europe's yield curve since 1992, causing losses at banks that sold notes based on the spread between short- and long-term debt.
``People have been badly burnt,'' said Nicholas Stamenkovic, a fixed-income strategist at RIA Capital Markets in Edinburgh. Banks ``were positioned to profit from a steeper yield curve. Then Trichet came out with his shock rate-hike announcement and the curve inverted.''
Anne Robert, a spokeswoman for Calyon, declined to comment. Pascal Henisse, a spokesman for BNP Paribas SA, France's largest bank by market value, also declined to comment, as did Russell Gerry a spokesman for Societe Generale SA, the No. 2 lender. All the firms are based in Paris.
Longer-maturity debt typically yields more than shorter- dated securities because investors demand a bigger premium to lend for a longer period.
Structured Notes
The yield curve has inverted in Europe because investors are betting the ECB will raise interest rates more than once, slowing the economy and inflation, making longer-dated debt more attractive. The yield curve on June 6 was the most inverted since October 1992, with a spread of 21 basis points.
Trichet told the European Parliament in Brussels today that he didn't mean to signal ``a series of increases.''
After the June 6 rate move, Calyon and other banks that sold so-called structured notes tied to the yield curve tried to hedge their positions by buying options on swap rates, according to one person familiar with the situation.
The cost of the options rose with a jump in volatility, a key component of the value of an option. The volatility in a one-month option on a one-year swap jumped to 29.5 percent on June 16 from 17 percent on June 4, before Trichet's comments.
`Just a Fallacy'
``More and more, we keep seeing trading books getting badly hit,'' said Peter Hahn, a research fellow at City University's Cass Business School in London and a former managing director at Citigroup Inc. ``The idea that you can safely hedge just about anything, no matter how structured, is just a fallacy. It's time banks realized that.''
The interest-rate trading losses follow record credit writedowns at banks in the last year, which hadn't anticipated the collapse of the subprime mortgage market and the ensuing credit contraction. Banks and brokers worldwide have recorded almost $400 billion of writedowns and losses since the value of bonds tied to mortgages began to sink last year.
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