The market's only derivatives transaction last week featured the Salt River, Ariz., Agricultural Improvement and Power District selling $73 million of derivatives as part of a $726 million issue.

Senior manager Bear, Stearns & Co. sold floating-rate securities reset at a 35-day auction and corresponding inverse floating-rate securities.

The firm sold $26.7 million of each structure on bonds due in 2011 and $10 million of each type on bonds due n 2012. The inverse floaters were not leveraged.

"We had a target saving of 10 basis points and in this case we were able to save 13 basis points," an official at the district said.

Activity was light again for the week. Investors are shying away from some of the more volatile products like inverse floating-rate securities, derivatives professionals said. Uncertain how interest rates will move next, investors are unwilling to place big bets.

"There is little distinct sentiment on either side of the market, so the market has been a little slow," one professional said.

Issuers, however, have continued to cash in swaps for substantial profits as rates have declined.

Over the past two years, many issuers have entered swaps and agreed to pay short-term floating rates in return for a fixed-rate payment.

Because fixed rates have declined since the swaps took effect, many of the issuers are now receiving above-market fixed rates on their transactions, while paying current shortterm rates.

At each payment date for the life of the swap, issuers receive the difference between the two rates. The value of that future cash flow has increased as rates have fallen.

Many of the swaps give issuers the option of terminating the exchange of payments in return for a free.

"Since the market has rallied, some issuers that put on fixed to floating swaps have opted to take their gains out," said Sheldon L. Sussman, senior vice president in the municipal swaps area at Lehman Brothers.

For example, one Lehman client entered a swap in February 1992. The issuer had high-coupon bonds outstanding that could not be advance refunded and were not eligible for ordinary refunding for five years.

The issuer, which Sussman declined to name, opted to enter a swap with Lehman, paying a variable rate and receiving a fixed rate, the helped offset the expensive bonds. The swap had a maturity of five years, matching the issuer's liability on the outstanding bonds.

Because rates have dropped considerably since February, the swap has become quite valuable.

Including the payments the issuers received for the first two years of the swap and the termination fee from Lehman, the issuer collected more than $2 million on the transaction, Sussman said. "That's 13% of the national amount in dollar benefits," he said.

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