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For Weekend Editions June 15-16 Heavy Supply Limiting Muni Market Price Rally

June 14, 1985

NEW YORK (AP) _ An eager core of municipal bond issuers, ready to step in at a day’s notice when interest rates decline, has kept a steady stream of tax-exempt issues flowing to market this spring.

But the ready expandability of municipal supply is being cited as a main reason that the price gains in tax-exempt market have been smaller than those on Treasury issues during the otherwise impressive three-month bond rally.

Analysts also say uncertainties about what sort of tax revision program may emerge from Congress has limited the price gains in the tax-exempt market.

Yields on 30-year Treasury bonds have fallen from nearly 12 percent in mid- March to 10.32 percent as of midday Friday. The yields on a sampling of 20 tax-exempt issues, meanwhile, have fallen to 8.66 percent from 9.82 percent, according to Bond Buyer, a trade newspaper.

Bond yields move in the opposite direction of bond prices.

John O’Brien, executive vice president at the municipal bond dealer Adams, McEntee & Co. Inc. in New York, said, ″Buyers have been willing to take a lot of municipal bonds but not all that the market has been able to produce.″

He said in this instance, the flexibility of the municipal market has tended to limit price gains.

While the federal government adheres to a fairly regular schedule of borrowing from which it rarely varies, O’Brien noted that state and local governments that issue municipal bonds are free to adjust their financing schedules to conditions in the marketplace.

That has meant, O’Brien said, ″we have had an expandable supply of municipals as rates come down.″

Howard Sitzer, a fixed-income researcher at the investment firm Thomson- McKinnon Securities Corp., said the main contributor to the recent heavy municipal supply have been advanced refunding issues.

Proceeds from such issues help retire and replace bonds issued at much higher rates in advance of when they would otherwise mature.

″We are having advanced refundings announced on a day-to-day basis,″ Sitzer said. He said some of the issues being retired early were sold in 1981 and 1982 at yields of 12 percent to 14 percent.

He noted that even with the heavy supply, current municipal yields are near their lowest levels in five years.

Adams’ O’Brien said uncertainty about the tax bill pending in Congress may also be limiting price gains in the tax-exempt market.

Included in the proposal to lower individual tax rates are provisions that would outlaw advanced municipal refundings and end the tax-exemption for industrial revenue bonds which make up a major share of the municipal market.

O’Brien said both provisions could spark a rush to market later this year if it becomes clear that they will be retained in the final version of the bill.


Moody’s Investors Service Inc., one of the nation’s major credit rating agencies, said this past week it had completed its review of the bond ratings for 10 local governments which were involved with the failed government securities dealer, ESM Government Securities of Fort Lauderdale, Fla.

The credit rating agency said it made the reviews to evaluate the impact of potential revenue losses on each governmantal unit’s financial position.

ESM closed March 4 owing creditors about $315 million. The local governments were involved in repurchase agreements with ESM. In essence, the agreements meant the local governments lent ESM cash in exchange for government securities with the understanding that ESM would later repurchase the securities for the original price plus interest.

Moody’s review resulted in lowered ratings on issues from four of the governments - general obligation bonds from Beaumont, Texas, and Clallam County, Wash.; sewer bonds from Harrisburg, Pa.; and hospital bonds from Clark County, Nev. The ratings for the other issuers were not changed.

Moody’s said the cities of Tempe, Ariz., and Tulsa, Okla., for instance, had taken possession of the collateral in their ESM transactions and were able to liquidate their investment positions with minimal losses.

It also affirmed ratings for Pompano Beach, Fla.; Toledo, Ohio; Clallam County Public Utility District No. 1; and the general obligation rating of Clark County, Nev.

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