The municipal bond market posted extraordinary gains in 1991 -- gains that were accentuated in trading late last week and reflected in the week's municipal bond yield indexes, which posted record lows.

The market's 1991 advances were unevenly distributed according to yield and maturity. The shorter a bond's maturity and the higher its rating, the better it fared this year, according to Delphis Hanover Corp., the municipal bond market analysis firm based in Southbury, Conn.

It was a year when an economic recession, combined with a constant prospect of interest rate cuts by the Federal Reserve, spurred bonds higher and drove yields down.

By Dec. 26, investors were willing to receive 165 basis points less in yield than they had been a year earlier on triple-A rated securities maturing in one year, according to Delphis Hanover.

But even securities maturing in 2031 and at the speculative end of the rating gamut benefited from the Federal Reserve's half-dozen discount rate cuts in the 12-month period. Triple-B rated municipals maturing in 2031 improved 45 basis points by Delphis Hanover's calculations.

"This is a pretty noteworthy change," a Delphis-Hanover official said. He added that Thursday's close brought new highs for the market, with yields on all maturities and credit ratings at lows for the year.

The firm calculated the national average of yields on triple-A securities maturing in 1992 at 3.70%, while the top-quality bonds maturing in 2031 offered a 6.50% yield to investors.

Double-A bonds ranged from 3.90% on the short end to 6.70% on the long end, while A-rated bonds ranged from 4.20% to 6.90%. Triple-B securities ranged from 4.60% on the short end to 7.25% on the long end.

That means quality spreads -- the difference in yield between securities of similar maturity but differing credit quality -- were 90 basis points on the short end and 75 basis points on the long end.

At those levels, quality spreads remain historically narrow. As the firm Gabriele, Hueglin & Cashman noted in its January newsletter, lower rated bonds do not adequately compensate most investors for the added risk.

"Prudent investors will continue to emphasize quality in their purchases and take advantage of the municipal market's inexplicably narrow quality spreads to upgrade their portfolios," the firm's newsletter advises. It estimated spreads between triple-A bonds and those on the bottom rungs of the rating ladder as 60 basis points. Those spreads were as wide as 250 basis points in 1981, according to Delphis Hanover.

Gabriele Hueglin notes that given the severity of the recession, investors should be all the more careful about buying lower-grade securities.

The investment house cites a 1988 study by Enhance Reinsurance Co. and says defaults tend to occur about 18 months after a downturn begins. "The recession is now over a year old," according to the firm's newsletter.

Friday's Market

On Friday, the market advanced 1/4 point in very light trading.

In the secondary market, New York city bonds picked up several basis points. The state market was quieter but strong. A $5 million block of New York State University 6 3/4s of 2021 traded at 97 1/4, to yield 6.97%, one trader said.

In the dollar bond market, Port Authority of New York and New Jersey 6 1/2s of 2021 changed hands at 98 1/2-99 1/4, up from 97 3/4-98 1/2 Thursday, and yielding 6.61s. Pennsylvania Turnpike 6 1/2s of 2013 were quoted at 99 1/2-3/4, to yield 6.54%.

Some signs of life appeared in the debt futures market, where the March municipal contract fell 4/32 Friday morning to 96 26/32. At the same time, the June municipal contract was quoted down 3/32, at 96 10/32. But by late in the afternoon, traders bought the contracts, erasing the March losses and leaving the June contract off only 1/32 at 96 12/32.

In the short-term municipal note market, a trader reported no activity as market players battened down hatches for the year's end. "Nobody wants to do anything," he said. "People are positioned for yearend. They want it to be Jan. 2."

Another source said Friday that activity will not revive until the second week of the new year.

Primary sector activity next month, so far, appears as though it will be small. The 30-day visible supply totaled a mere $932 million Friday.

But dealers' shelves are as bare as those of a Moscow grocery store. The Blue List of dealer inventory, compiled by Standard & Poor's Corp., slipped to a new low for 1991, totaling $774 million on Friday.

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