July 31, 2007 / 7:39 PM / 12 years ago

Lehman Brothers to launch new muni bond swaps

By Anastasija Johnson

NEW YORK, July 31 (Reuters) - Lehman Brothers LEH.N on Wednesday will launch a new swap product that will allow investors to bet on U.S. municipal bonds without actually owning them directly.

The new product, called the Lehman Brothers Municipal Index Swap, is a forward-starting agreement allowing investors to take positions on the yield of new five and 10-year swap indexes, the firm said in a primer.

The new swap product is a response to the rapid expansion of municipal structured products in the past few years and increased penetration of foreign investors into the $2.4 trillion U.S. tax-exempt market.

Lehman said further growth of muni derivative products has been hindered by a lack of a reliable high-grade cash market benchmark yield curve. The firm added that there are strict eligibility requirements for inclusion in the indexes.

The new indexes will only include general obligation bonds rated “Aa3,” “AA-minus,” or higher, excluding insured and prerefunded bonds. Only bonds from deals of $75 million or higher can be included and each issuer cannot represent more than 10 percent of an index.

The new product will be an alternative to swaps based on an index compiled by the Securities Industry and Financial Markets Association (SIFMA), formerly the Bond Market Association (BMA) index.

Muni swaps can be used to either bet on the direction of interest rates in the muni market or hedge exposure to U.S. state and local government debt.

Market participants currently use U.S. Treasuries, London Interbank Offered Rate or SIFMA swaps to hedge their muni bond exposure.

The notional amount of interest rate derivatives outstanding grew almost 14 percent to $285.7 trillion in the second half of the year, according to the International Swaps and Derivatives Association.

((Reporting by Anastasija Johnson, editing by Leslie Adler; Reuters Messaging: Anastasija.Johnson.reuters.com@reuters.net; e-mail: anastasija.johnson@reuters.com; Tel 646-223-6342)) Keywords: MUNICIPALS SWAPS/LEHMAN

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