As the Clinton budget plan moved forward this week, the possibility of higher taxes combined with the likelihood of a lower deficit boosted prices in the municipal market and pushed down yields on all The Bond Buyer indexes.
The average yield to maturity of the 40 bonds used in the Municipal Bond Index fell six basis points this week, to 5.73% from last week's 5.79%.
The yield on the 20-bond index of general obligation bonds fell four basis points, to 5.61% from 5.65%. The yield on the 11-bond index fell three basis points, to 5.53% from 5.56%.
The 30-year revenue bond index declined four basis points, to 5.83% from 5.87% last week.
The falling yields reversed the trend of the past three weeks, during which the municipal market lagged the Treasury market.
Although rates in the Treasury market are close to record lows, the Municipal Bond Index is still higher than its record low of 5.69% on July 16.
"The taxable sector has outperformed [the tax-exempt market] for the past month, but the municipal market is poised to catch up, especially if Congress passes the Clinton tax package." one trader said.
The short end of the market was also strong, as fears that the Federal Reserve might raise rates subsided.
Federal Reserve Chairman Alan Greenspan's testimony to Congress in late July had sparked fears that the Fed would raise rates at a time when the economy is still weak.
But despite rising gold prices, economic statistics released last week helped reduce the market's jitters.
The yield on The Bond Buyer one-year note index fell six basis points this week, to 2.93% from 2.99% last week.
The Commerce Department's preliminary report on gross domestic product for the second quarter revealed that inflation was still in check and growth was slower than expected, one trader said.
Another positive factor aiding last week's market was the reduction dealer inventories. Standard & Poor's Corp.'s The Blue List, a widely followed barometer of unsold bonds in dealers' inventories, dropped below the $2 billion mark after exceeding that amount for seven consecutive days.
The streak was the longest since 1987, when The Blue List was over $2 billion for almost two straight months between February and April, preceding the bond market crash of 1987.
Some investors see the long and short ends of the market as the most attractive.
"We're looking at a barbell strategy to capture the rally at both ends without getting stuck in the intermediate sector," one portfolio manager said. Excess supply will hurt prices in the intermediate sector, the investor noted.
Supply tailed off this week, as issuance was light except for Tuesday's $3 billion in new issues. A potential $600 million issue from the New York State Dormitory Authority was postponed Thursday.
