Formosas, the Fed, and the billion-dollar Bermudan trade

Rates options desks on alert as decline in Formosa bond issuance could hit profits and raise US volatility

Taiwan doesn’t seem like a country that should weigh heavily on the US interest rates market. Yet the callable bonds that the small island nation’s life insurers buy in bulk are helping power the US swaptions market, holding down US rates volatility – and generating an estimated $200 million a year in profit for some banks' rates desks.

“This is probably the single most profitable part of the rates options market-making business that exists, and globally this is arguably all of the money that

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