The Bond Buyer's municipal bond indexes drifted upward this week to their highest levels in nearly two years, as market participants spent most of the week speculating about and reacting to the Federal Reserve's monetary policy.

The 20-bond index of general obligation yields rose six basis points, 60 6.43% from 6.37% last Thursday, while the 11-bond GO index increased five basis points, to 6.34% from 6.29% a week ago. That was the highest point either index had reached since Nov. 5, 1992, when the 20-bond index was 6.51% and the 11-bond index was 6.42%.

The 30-year revenue bond index increased four basis points, to 6.70% from 6.66% a week ago, and reached its highest level since Nov. 5, 1992, when it was also 6.70%.

The average yield to maturity of the 40 bonds used in calculating the daily Municipal Bond Index - most of them revenue bonds - rose four basis points, to 6.57% from 6.53% last Thursday. The yield is now at its highest level since June 3 of this year, when it was 6.61%

Prices of long-term U.S. government securities fell slightly farther than municipals this week, with the bellwether 30-year Treasury bond's yield jumping eight basis points, to 7.85% from 7.77% last Thursday.

Bond prices fell 1/8 point Friday in light activity punctuated only by a few bids-wanted lists.

Traders said the market, lacking a new economic report to focus upon and preoccupied with the Federal Open Market Committee meeting scheduled for Tuesday, lost steam early in the day.

The speculation over the Fed's monetary policy continued to dominate the market Monday, with participants divided mainly over the timing of the Fed's next interest rate tightening. Prices finished unchanged to 1/8 point higher in light activity. The day's sole economic report, sales of existing homes, showed a 1.8% decline in August that was in line with expectations and had little impact on bond prices.

On Tuesday, the Federal Open Market Committee decided not to raise interest rates, and the fixed-income markets reacted by pushing long-term prices lower. Municipals fell 1/4 point, while Treasuries fell a steeper 1/2 point.

Municipals recouped some of those losses Wednesday, rising 1/8 to 1/4 point in a moderately active session that featured short-covering and saw bid lists sell fairly well. The 30-year Treasury bond also rose roughly 1/4 point on the day, despite a 6% increase in durable goods orders for August.

That rally dissipated after one day, however, as stronger-than-expected economic indicators pulled the rug out from under prices and pushed them about 1/4 point lower. New home sales jumped 9.7% in August, initial claims for state unemployment insurance benefits fell 11,000 in the week ended Sept 24, and the U.S. gross domestic product grew at a revised annual rate of 4.1% in the second quarter, up from the earlier estimate of a 3.0% gain.

In the short end of the municipal market, The Bond Buyer's one-year note index inched up one basis point this week, to 4.10% from 4.09% last Wednesday. It is now at its highest level since Aug. 17, when it was 4.12%.

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