The municipal bond market has regained its composure, and tax-exempt bonds have retraced more than half the ground they lost between mid-October and Thanksgiving. It wouldn't be surprising to see rates decline soon to new lows, putting them at their lowest levels in 20 years.

The main impetus behind rising bond prices and declining bond yields last week was new evidence that inflation - the ruination of fixed-income investments - is remaining in check. Last Thursday, the Labor Department reported that wholesale prices were flat in November, and on Friday it disclosed that retail prices had risen 0.2% last month. Over the last year, wholesale prices have inched up only 0.3%, and consumer prices, 2.7%. Over the last six months, consumer prices have risen at a rate of just 1.8%, Federal Reserve Board Chairman David Mullins noted last Tuesday as he spoke at a conference sponsored by the American Enterprise Institute.

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