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Bond Rally Helps Municipal Market Pick Up Steam

September 10, 1988

NEW YORK (AP) _ After a sleepy August that saw record low sales volume, the municipal bond market has picked up steam.

Trading in bonds issued by state and local governments normally revives with the coming of autumn after the summer doldrums. But the ″muni″ market also is getting a lift from the recent robust rally in bond prices in general, touched off Sept. 2 by government economic reports signaling a slowdown in the economy and suggesting an easing of inflation.

The bond rally has again lured to municipals many investors who were soured on the stock market by last October’s crash.

As bond prices have risen, they have pushed interest rates lower. The yield on highly-rated municipal issues is now averaging around 7.98 percent, down from 8.10 percent on Sept. 1, the day before the economic reports were released.

If municipal yields keep falling, to a target level of around 7.40 percent to 7.50 percent, a flood of new issues could be brought to market, some analysts believe.

″It’s a return to more traditional pulses,″ said William Fish, a senior vice president of Donaldson, Lufkin & Jenrette Securities Corp.

The pickup in activity is a welcome relief to market players after the dog days of August, when sales of long-term municipal bonds nationwide dropped to around $5.51 billion - the lowest monthly total in 2 1/2 years. Muni sales hadn’t been that skimpy since February 1986, when only $3.18 billion of the bonds changed hands.

Sales normally run around $8 billion a month.

The September revival is reflected in the volume of new munis scheduled to hit the market. This coming week, for example, several big issues are planned: from Illinois ($175 million), Ohio ($155 million), Washington State ($50 million), the New York State Mortgage Agency ($450 million), Montgomery County, Md., ($50 million) and the Metropolitan Seattle Sewer District ($48 million).

But in addition to scheduled issues, there’s a ″shadow calendar″ of new munis that’s also expected to swell this month. In those instances, the state or local entity issuing the bonds waits for interest rates to fall or to see how other muni issues are received by the market.

If conditions are right, the issuers emerge from the shadows. ″We then tend to have a mini-rush to market,″ said Neal Attermann, vice president and municipal research director of Kidder Peabody & Co.

Especially sensitive to interest-rate declines are negotiated municipal issues, in which the issuer and an underwriter negotiate with each other and reach agreement on the terms of the issue. They are more hidden from the market than competitive issues, where the issuer accepts bids from several underwriters seeking to finance the issue.

Because negotiated issues are more confidential, their sponsors can easily keep them hidden on the ″shadow calendar″ until they feel the time is right. Around 60 percent to 70 percent of all municipal issues are negotiated, according to analysts.

This month, ″negotiated issues could come out of the woodwork,″ said Fish of Donaldson, Lufkin.

End Adv Weekend Editions Sept. 10-11

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