The outlook for municipal bonds darkened last week, and lower tax-exempt bond yields seemed much less likely this fall than they did a few weeks ago.

The volume of new bond issues for sale is the biggest reason: Sales have increased sharply, probably much more than the municipal bond market expected, and investors have become more selective. Casualty insurance companies, faced with heavy payments to policyholders for Hurricane Andrew damage, are buying fewer new bonds and are selling some old ones.

Gov. Bill Clinton's continued lead over President Bush in opinion polls may also be something of a negative influence. And, finally, last weeks' European currency crisis has had some impact.

These influences caused the Bond Buyer Index to rise to 6.27% from 6.16% a week earlier, reversing a decline that had lasted two weeks. Now the municipal bond market must decided whether last week's rise in bond yields and decline in bond prices have some distance to go. Or will the rise in prices that lasted from Aug. 17 to Sept. 10 reassert itself and even drive interest rates down to new lows?

The new-issue supply will remain heavy as the lowest borrowing costs in 14 years lure issuers. But economic news remains favorable for bonds. Inflation is staying under control as last week's modest 0.3% increase in the Consumer Price Index showed. Retail sales, meanwhile, dropped 0.5% last month, and industrial production also declined 0.5%. If last summer's trend toward lower bond yields does resume, it will be driven largely by this combination of economic weakness and low inflationary pressures.

The politics of the presidential campaign now have become a modest negative for the credit markets. Neither President Bush nor Gov. Clinton has presented a credible program for lowering the federal deficit, and neither man apparently wants to dwell on the difficulties of reining in federal spending. If Mr. Clinton maintains his lead and wins the election on Nov. 3, the credit markets will watch him closely to see if he will, in fact, move the federal government toward fiscal balance. Right now, skepticism is high.

Europe similarly has become a negative, though a modest and distant one. The Treaty of Maastricht, yesterday's French vote on European union, and turmoil in the foreign exchange markets are a worry in the municipal bond market, but traders and investors can't decide whether it's really relevant. So they stay wary, and wariness doesn't prompt rising bond prices.

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