The municipal bond market last week withstood its biggest loss in 13 months. It hadn't dropped so sharply since its retreat just before the presidential election last year, and the latest setback went a long way toward convincing issuers, traders, and investors that 1993's great decline in long-term interest rates was over, finished, kaput.

This bearish conclusion that interest rates have touched bottom for this cycle may be overdone, and a number of leading economists remain steadfast in their view that bond yields will soon resume their downward course. In 1994, they predict, 30-year Treasury bonds will yield less than 5 1/2% and the Municipal Bond Index will yield less than 5%. But the argument is harder to make, and the reason is "legislated inflation."

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