If an investor or a dealer owned a position ("long a position") in government bonds, they would be able to protect that position from falling prices in one of three ways.

A "hedge" could be established by selling (selling short) similar bonds that the investor did not own, with the expectation of buying back those same bonds at much lower prices. The difference between the higher price at which the bonds were sold and the lower price at which they were repurchased would be profit and hopefully offset or at least limit the losses inflicted on the "long" position.

Or, a "futures contract" could be sold which is akin to selling bonds not owned (selling short).

Finally, the investor or dealer could protect themselves by simply selling the long position outright and going into cash.

These choices are possible because each individual Treasury issue is several billion dollars in size which allows you to repurchase the same bonds that were sold. In other words, if an investor were to "short" the new 3-year T-note, there are $8 billion in three-year notes outstanding, which allows the investor to "cover" or to "buy in" the three-year note that was sold short. Further, there is a large viable futures market in government bonds that functions on the Chicago Board of Trade and allows investors to protect their holding.

Through the years, this luxury to hedge or to protect one's "long" position in the municipal market has not been possible, for two reasons. First, tax exempt issues are too small, and it would be suicidal to sell a million dollars worth of muni's "short" if only $50 or $100 million of that issue was outstanding. And second, there has been no futures market and hence no future contract in municipal bonds.

On June 11th, this will change as a municipal futures contract will begin trading on the Chicago Board of Trade. Kevin Walsh of the First Boston Corporation believes that this introduction of the municipal futures contract "will revolutionize the municipal bond market, providing the contract will be viable." A viable contract means that sizeable amounts of the $100,000 contract may be bought or sold without disrupting the price of the contract. The new contract which is actually on an index of some 40 different municipals, will have an 8 percent coupon and a maturity of 20 years.

Assuming a viable contract, dealers and investors will now be able to protect their long positions against falling prices by selling (short) a corresponding amount of muni contracts. If prices fall, the price on the contract will also fall and will therefore offset the decline in prices of the actual long position that the investor owns. The introduction of this vehicle opens up new horizons and has many implications.

For the investors, it will allow them to hedge their long positions and to protect those positions from declining prices.

The Treasury will offer a five-year two-month note in minimums of $1,000 on Wednesday. They should return around 10 percent.