The derivatives slowdown continues. Through the first two months of the second quarter, just 24 new issues totaling $765 million included derivatives, according to MuniView.
If the trend holds for June, quarterly derivatives volume will drop below $1.5 billion for the first time since the fourth quarter of 1992.
Of course, overall issuance in the municipal market is also down substantially over the same period.
No new issues in the past week included derivatives. One derivatives professional said that last week he was "sitting around twiddling my thumbs."
Others said that for the past few months the action in derivatives has been concentrated in less visible sectors of the market, including swaps, forwards, and investment agreements. MuniView's volume statistics do not include those types of products.
Some issuers are entering fixed-to-floating rate swaps to better manage assets and liabilities, and others are using derivatives on investment agreements and reserve fund structures, one official said.
Since the tax-exempt yield curve has flattened, forward rates have not risen as fast as current rates. That makes forward transactions cheaper relative to current issues than they were last year.
"Issuers can lock in today's forward rates and even though interest rates are up substantially, forward rate are not as much above spot rates as they were," said Aaron Gurwitz, vice president and manager of municipal capital markets at Goldman Sachs & Co.
Two weeks ago, the Chino Basin Regional Financing Authority completed an $87 million new issue that included $32 million of derivatives. The 2020 maturity consisted of $16 million of auction-set floating-rate securities and $16 million of corresponding inverse floating-rate securities.
An official at senior manager Paine Webber Inc. said the use of derivatives saved the issuer five basis points.
The two types of securities included in the Chino Basin issue are usually sold separately with an option for linking sometime in the future.
But on the Chino Basin deal, the two securities were sold to investors in linked form, turning the usual option upside down. A holder will have the option to delink in the future. In the meantime, the holder owns a fixed-rate bond.
Patriot Closes Muni Shop
Patriot Securities LP has closed its municipal derivatives operation. Patriot's municipal derivatives group provided advisory and brokerage services on derivatives to regional firms and financial advisers.
The department was formed last summer and began full-scale operations at the beginning of this year.
Patriot is an active player in the mortgage-backed securities and repurchase agreement markets. The firm is a limited partnership owned by Liberty Brokerage and private investors.
The department was scaled back after the departure of Brett Whysel at the end of March. When Whysel left, he was not replaced and Patriot decided not to offer brokerage services on swap transactions, sources familiar with the situation said. As reported, Whysel joined Smith Barney Shearson.
Then, in April, Patriot officials decided to shut down the entire municipal department.
John Sickles, director of the municipal derivatives effort, declined to comment. Other officials at Patriot did not return calls for comment.
One professional at another firm said the Patriot situation reflects the relative immaturity of the municipal derivatives market.
"It may be a good idea, but right now the market is still dominated by the heavily capitalized players with derivatives and underwriting capabilities," the professional said. "It's not exactly a wide-open field."
Volume of derivative transactions has also been lower this year. "When you have the guys at the [major firms] not doing much, you can forget about the people at the fringes, another professional said.
But another municipal swap broker, Euro Brokers Investment Corp., is still committed to brokering municipal deals.
"We're delighted with the progress we've been making," Peter Shapiro, senior vice president at the firm, said yesterday. "We know it's a long and treacherous process, but we're pleased with our position as it exists today."
