Linking is all the rage. Investors holding inverse floating-rate securities are opting to link their derivatives with corresponding auction-set floating-rate notes, market participants said.

By linking the securities, the investor creates an ordinary fixed-rate bond.

"With the market up lately, people are taking the opportunity to de-leverage and get out of the inverse play," one derivatives professional said.

In some cases, an inverse floater investor may link by exercising a call on the floater. In other cases, the inverse floater holder must put in a bid for the floater at the auction.

Investors linking during the market's sporadic strength in the past two weeks are a reflection of bearish sentiment, market participants said. If investors expected the market to continue to rally, they would be less likely to unwind their inverse floater positions.

In the primary market, new-issue volume was light in the past week. A $196 million issue for the Metropolitan Pier and Exposition Authority on behalf of McCormick Place in Chicago was priced yesterday without derivatives. Lead manager Smith Barney Shearson considered including floating-rate securities and corresponding inverse floating-rate securities, according to market participants.

Last Wednesday, the Illinois Health Facilities Authority issued $108 million of bonds for the University of Chicago Hospital Project. Senior manager Morgan Stanley & Co. included $27.9 million of floating-rate securities and $27.9 million of corresponding inverse floating-rate securities in the 2021 maturity. The derivatives are insured by Municipal Bond Investors Assurance Corp.

A Morgan Stanley official said the use of derivatives saved the issuer "a solid 10 basis points."

The California Higher Education Loan Authority used a $40 million swap to create synthetic floating-rate debt service on a portion of its $115 million bond issue last week. The authority will pay a floating rate on the swap and receive a fixed rate covering taxable bonds maturing in 1997 to 2001. The notional value of the swap will decline in accordance with the amortization schedule of the bonds.

The issue, managed by Paine-Webber Inc., also included $50 million of floating-rate bonds reset at auction every 35 days and maturing in 2005.

State student loan authorities are among the most active users of swaps. While the authorities may collect interest at a floating rate pegged to the rate on the 90-day Treasury bill, that is rarely the cheapest way for the authorities to borrow.

So the authorities issue fixed-rate bonds and use swaps to convert the debt service to a floating rate that matches the incoming payments from the student loans.

The California authority also has $37 million invested at a floating rate of return, as of Sept. 30, 1993, according to a preliminary official statement for the issue.

Changes at J.P. Morgan

Shaun N. Rai, vice president at J.P. Morgan & Co., has been promoted to head the bank's municipal derivatives effort. Rai takes over for Robert Rossman, also a vice president, who moved in April to head corporate swaps marketing in New York City.

J. P. Morgan has been active in the municipal swaps arena, as many issuers are attracted by the bank's triple-A ratings.

Rai joined the bank in 1985. After spending six years in municipal finance, he moved to the derivatives desk in January 1991.

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