As the municipal market heads into the fourth quarter, it stands almost midway between its high and low yields for the year. Odds are that it will to do pretty well between now and year's end.
The Bond Buyer Index rose last week to 6.33%, which is 46 basis points below its March 19 high of 6.79% and 44 basis points above its July 30 low of 5.89%. At this level, it's as good a time as any to assess the outlook for the quarter ahead and try to figure out where interest rates are headed between now and New Year's Day. In this effort, the case for lower rates seems more convincing.
Bond yields have risen for two weeks, chiefly because borrowers have scheduled a record volume of bonds for sale and because of investor wariness over the turbulence in foreign exchange trading. Late last week, however, interest rates turned downward amid new evidence that the economy really has no drive, nothing to sustain the sluggish recovery supposedly under way.
The Federal Reserve last week published its "beige book," the report it will use to help set monetary policy when its governors and regional bank presidents meet on Oct. 6, and the book provided no reason not to ease rates further. Inflation isn't a problem, and regional economies are not expanding with any real vigor. The national economy grew at an annual rate of only 1.5% in the second quarter, or about half its 2.9% rate in the first quarter, but neither rate is anything to crow about, and growth in the third quarter probably isn't either.
The most important unknown facing the credit markets, of course, is the president election, and it may become even more difficult to figure out if Ross Perot goes on CNN's "Larry King Live" tonight and re-enters the race. Apparently the Texas billionaire is unhappy that neither President Bush nor Gov. Clinton has promised to do more to eliminate the federal budget deficit.
If Mr. Perot shifts the focus of the campaign more toward the federal deficit, the credit markets ought to benefit. There's little chance that a tougher fiscal policy will be put in place quickly, but Mr. Perot's rejoining the race will make the deficit a real issue again. As The Wall Street Journal reported on Sept. 15, "the fiscal proposals of Bush and Clinton both flunk arithmetic."
Granted, there's a large volume of new bond issues to be sold, but economic sluggishness and pressure to ease monetary policy will dominate the credit markets in the fourth quarter. Bond yields will end 1992 closer to the year's low.