Futures market players are rolling Over into the December municipal bond contract a little earlier than usual, traders and analysts said.
The September contract still has three weeks until expiration, but open interest is already shifting over to the December contract.
The futures market was roiled by volatility when the June Contract expired, and rolling into the September contract was costly for some investors.
"There were some wild swings going into expiration last time and some people. want to avoid the volatility," one market participant said.
Yesterday, the September contract closed at 91 7/32, 13/32 over the price of the December contract. Estimates of fair value for the two contracts vary, with some traders expecting the spread to widen.
A wildly fluctuating spread can complicate rollover trades for investors and dealers with large futures positions.
Open interest on the September contract dropped 16% to 16,850 contracts last Friday from one week earlier. Interest in the December contract rose to 4,664 contracts from 1,807 contracts over the same period.
Average daily volume in the December contract was 1,065 contracts during the week, up from 512 contracts one week earlier. Average volume in the September contract dropped to 3,736 from 4,234 a week earlier.
Not everyone is rolling over early, though. A trader at one firm said he expected a weaker market heading toward expiration. That would make the December contract cheaper, increasing the spread on the rollover trade.
Traders also said that arbitrage accounts are unwinding trades put on during the last few weeks. When the September contract was rich relative to the cash market, the accounts sold futures and bought cash market bonds. Now they are buying back the contract and selling bonds, market participants said.
At the end of July, the contract was just 1/32 below the price of the cash market as measured by The Bond Buyer's 40-bond index, Yesterday the gap widened to 3/4, then settled back to almost 1/2.
In the secondary market, Bankers Trust continues derivatizing fixed-rate bonds. Last week, Moody's Investors Service reported rating seven secondary market derivatives, all sponsored by Bankers Trust, totaling $61 million.
A variety of issuers' bonds back the Bankers Trust transactions, including general obligation debt of New Jersey, Minnesota, Connecticut, Washington, and Georgia.
In California, a bill easing the creation of secondary market derivatives has reached the governor's desk. Assembly Bill 3073, passed by both houses of the state legislature, would exempt most secondary market derivatives from a law passed last October that was intended to prevent abusive lease-related transactions.
The law, Section 25403 of the state's corporations code, requires that firms get issuers' written permission before creating secondary market derivatives.
The law applies to bonds issued by any city, county, city and county, school district, special district, or other local agency in the state. The law does not apply to issues backed by the state itself.
