Derivatives volume declined 43% in the first quarter to 45 issues totaling $1.58 billion from 49 issues totaling $2.77 billion during the same period last year, according to MuniView.

Volume was down 25% from the fourth quarter of last year when 95 issues totaling $2.12 billion were sold.

The volume of secondary market transactions rated by Moody's Investors Service in the first quarter held steady, however. Moody's rated 74 deals totaling $1.24 billion in the first quarter, down slightly from the 83 deals totaling $1.26 billion last year.

MuniView, which includes all primary market issues and some secondary market issues, said the quarterly total was the lowest since the fourth quarter of 1992, when only 20 deals totaling $645 million were sold.

At Moody's, while the total volume of rated secondary market transactions was stable, the mix of products changed significantly.

In the first quarter of this year, the vast majority of issues - $1.05 billion - was comprised of floating-rate securities and corresponding inverse floating-rate securities. A year earlier, just $516 million was structured as floater/inverse floaters, while $600 million was structured as tender option bonds.

Merrill Lynch handled the bulk of the floater/inverse floater volume, acting as the sponsor of 52 of the 64 issues in the first quarter, according to Moody's. Lehman Brothers was the sponsor on most of the remaining deals, Moody's said.

New issue volume over the past week was equally slow. Only one issue included derivatives. San Mateo County Joint Powers Financing Authority's $126 million issue priced yesterday included $40 million of derivatives in the 2029 maturity, insured by Financial Security Assurance Inc. The derivatives were evenly split between floating-rate securities and corresponding inverse floating-rate securities. A Paine-Webber official said the use of derivatives saved the issuer 10 basis points over a fixed rate issue.

A $356 million issues for the Pennsylvania Industrial Development Authority was priced yesterday without derivatives. A preliminary official statement included a menu of possible structures, such as inverse floating-rate securities, step-up bonds, and range trade floating-rate securities.

Officials at senior-manager Lehman Brothers did not return calls yesterday.

An official at another firm in the underwriting syndicate said that market volatility continued to deter investors from buying exotic securities.

Investors "just aren't ready to lay down a bet on the relationship between say the PSA rate and LIBOR," the official said.

Issuers continue using interest rate swaps despite the lull inprimary market issuance, market participants said.

"Issuers that sold bonds at lower fixed rates are taking the opportunity to swap to a floating rate," one dealer said.

Since the fixed rate that the issuer needs to receive on the swap to cover the bond payments is below prevailing fixed rates, the issuer can receive beneficial terms on the floating rate it must pay on the swap.

On Monday, for example, the prevailing fixed rate for a 10-year swap based on the public Securities Association's municipal index was 5.15%, according to a survey by EuroBrokers Capital Markets.

An issuer could pay the PSA index rate, last week at 2.8%, and receive 5.15% for 10 years. But if the issuer had sold 10-year bonds six months ago, it might not need the 5.15%. It might need only 4.75% to cover its bond payments.

So, the issuer could keep the extra 0.4% to offset its payments on the swap. Or, it could negotiate a lower floating-rate payment on the swap, such as the PSA indeex mius a fixed spread of 10 or 20 basis points in return for receiving a fixed rate of only 4.75%.

The spread on the swap - the difference between the fixed rate and the PSA index - could change from week to week, and the issuer could come out behind. If the PSA index rose to 8% and stayed at that level for eight of the 10 years, for example, the issuer would suffer higher total debt service than if it had not entered the swap.

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