CHICAGO -- The Bond Buyer Municipal Bond Index will be priced twice a day every day beginning tomorrow, officials at the Chicago Board of Trade said Tuesday.
The index currently is priced once a day except during the expiration months of the exchange's Municipal Bond Index futures contract, when it is priced twice a day. The contract expires in September, December, March, and June.
"We thought it would improve the efficiency of the index if everyone could see the prices more frequently," said William A. Trader, a senior vice president at the Chicago Corp. and a member of the exchange, at an exchange-sponsored seminar.
Under the new schedule, the index of 40 actively traded tax-exempt term bonds will be released at 11:45 a.m. and 2:45 p.m. Central time, every trading day.
Tom Clark, a vice president at Merrill Lynch who executes institutional orders in the municipal bond pit, said an exchange committee had discussed the change to twice daily pricing for months after receiving complaints from contracts users about "incorrect" pricing.
He said the move to twice dally pricing should alleviate "some of the problems of fair pricing of the index."
"It brings more integrity to the index," Clark said. "It gives everyone an opportunity to see where the index is while trading is going on, as opposed to when the contract is closed."
Reid Smith, an assistant vice president at Vanguard Group, a Valley Forge, Penn.-based mutual fund company, said the change in the frequency of pricing is the first contract change to "come down the pike" for several years. He said he favors any changes in the contract that would broaden participation in the index and increase liquidity.
The lack of liquidity in the contract has been a constant complaint by large market users, such as mutual funds. However, the contract has seen a jump in usage this year.
Patricia Mosley, a senior product manager at the exchange, said the eight-year-old contract has seen a 68% jump in volume this year compared to 1992. Volume as of Tuesday stood at 803,436 contracts, versus 478,997 for the same period last year. Open interest was 24,743 contracts as of Monday, compared to 15,381 contracts at the end of September 1992.
Mosley said the futures contract should surpass the 1 million mark this year and possibly top the 1,068,000 contracts traded in 1989. The all-time record for contracts was 1.6 million in 1987.
Clark attributed this year's surge in volume to increases in municipal bond issuance, primarily due to refundings.
"It brings more need for hedging positions, and there is speculative trading, like the MOB spread," Clark said, referring to the play between the municipal contract and the exchange's Treasury bond contract that takes advantage of price aberrations between the two.
Another use of the contract, constructing a synthetic long-bond position, has proved beneficial to Vanguard's $700 million New Jersey fund, in view of the changes that have taken place in bond issuance practices in the state, according to Smith, who spoke at the exchange's seminar.
In May, New Jersey Gov. Jim Florio banned most negotiated underwriting by the state and its agencies after a federal probe into a state turnpike authority deal began.
Smith said that the issuance of a lot of state debt has been postponed because of Florio's action, and that the price of any new issued debt has risen because of the shortage of state bonds. In the interim, he said, the mutual fund has been able to buy municipal bond contracts for its New Jersey fund that replicate the market exposure of holding the actual securities.
Once New Jersey bonds are back in the market at normal prices, Smith said the fund will unwind its futures position and buy the actual securities.