New-issue municipal bond volume fell to the lowest semiannual level in three years in the first half of this year, plunging almost 40% to $91.11 billion on 5,687 issues from from $149.13 billion and 7,300 deals in the first six months of 1993, according to information from Securities Data Co.'s data base.

Semiannual bond bolume has not been that low since the first half of 1991 when $75.11 billion of municipal debt was sold in 5,027 issues.

"It's been a pretty quiet world for everyone," said Claire Cohen, vice chairman at Fitch Investors Services. "And there aren't really any signs of volume going higher."

Short-term note volume, or issues with maturities under 13 months, took a similar downhill tumble, dropping 31% in the first six months of this year, to $18.14 billion from $24.32 billion in the year-ago period. The 1994 first-half note volume was the lowest semiannual total since the second half of 1990, when $18.13 billion was brought to market.

"What's happening in the short-term market is consistent with the bond market," said Robert Chamberlin, senior vice president of municipal research and marketing at Dean Wilier Reynolds Inc. "It's further verification that capital formation is not taking place."

The record new-issue volume of $290.94 billion generated in 199.3 was made possible by a rush of refundings as issuers sought to take advantage of a drop in municipal bond yields to the lowest levels in almost 20 years.

Last year, the Bond Buyer index of 20 general obligation bonds averaged 5.59%, the lowest yearly average since the 5.20% recorded in 1973. In the January to June period, the 20-bond index has averaged 5.87%.

On Oct. 15, 1993, the yield to maturity of the 40 bonds used to calculate the daily Municipal Bond Index reached an all-time low of 5.34%.

The drop in rates prompted issuers to refund the high-coupon debt sold in 1983, when the 20-bond index averaged 9.51%. Last year, straight refundings and combined new-money/refunding issues reached a record $191.8 billion, or 66% of total volume, a 56% jump from the $122.75 billion recorded in 1992.

In the first half of 1994, with local economies rebounding around the nation, new-money issuance has been driving the market. New-money issues are up 21% to $56.03 billion from $46.46 billion in the first half of 1993.

In 1993, with state and local governments working under tighter budgets, new-money deals spent the year on the downside. In 1993, new-money issues took a 12% tumble to $99.07 billion, the first time they did not top $100 billion since 1990.

"Capital-intensive sectors, such as electric power, utilities, and surprisingly, transportation, are what's dragging the bond market down," Chamberlin said. "However, there are strong indications that munis may turn back into a cottage industry, with smaller issues for the most basic needs."

Bonds used to finance electric power deals plunged 78% in the 1994 first half to $3.66 billion from $16.8 billion. Issuance for other utilities, such as water and sewer, gas, and flood control, dropped 48% to $10.33 billion from $19.79 billion, while transportation issues were off 41% to $9.43 billion from $15.87 billion.

In the first half of 1994, refundings accounted for 42% of issues in those three sectors. In the 1993 period, straight refundings made up 60% of the deals from those three sectors.

In the transportation sector, however, new-money issues did post a 27% increase to $6.81 billion from $5.36 billion.

Chamberlin noted that bonds issued to finance sectors such as education and housing projects and the bank-qualified categories have been least affected by current market conditions.

The volume of education issues dropped 25% in the first six months of 1994 to $18.14 billion from $24.32 billion in the six-month period a year ago. However, education issuance accounted for 20% of new volume in the first six months of 1994, compared with 16% in the year-earlier period.

Bonds used to finance student loans actually rose in the first half, to $1.78 billion, an increase of 13% over the $1.58 billion of a year ago.

A spokesman for the National Association of State Universities and Land Grant Colleges noted that there has been a program to phase out the direct student loan program. "The state guarantee agencies, as lenders of last resort, may be gearing up in anticipation of the increased need," he said.

A spokesman for the American Association of State Colleges and Universities observed that steps taken by Congress through amendments to the Higher Education Act of 1992 may have opened the flood gates for student loans.

An article in the April 19, 1994, edition of Education Daily, an industry newsletter, said the amendment liberalized student loan eligibility by creating an unsubsidized Stafford Loan program for wealthier borrowers, increasing loan limits, removing borrowing caps on Parent Loans for Undergraduate Students, and liberalizing needs-analysis criteria by removing home equity from the equation.

According to Education Daily, in the first quarter of 1993, the Education Department guaranteed about $3.4 billion in Family Education Loan volume. That volume swelled to $5.3 billion in the first quarter of this year, a 56% increase.

Housing is the only bond proceeds sector to gain from the year-ago period, rising about 14% in the first six months of this year to $7.14 billion from $6.29 billion a year ago. The year-over-year gain, however, was due mainly to the June 1992 expiration of the tax exemption for mortgage revenue bonds. The loss of the tax exemption depressed housing bonds sales until September 1993, when the tax exemption was made permanent.

Industrial development financing was virtually unchanged in the first half of the year, but new-money issues jumped 28% to $2.03 billion from $1.59 billion. The economic development component enjoyed a 6% increase, to $2.32 billion from $2.18 billion.

Bank-qualified issuance was down 20% in the January to June period, falling to $7.25 billion, or 8% of new volume, from $9.09 billion, or 6%, a year ago.

Dean Witter's Chamberlin was able to muster some optimism, at least for the near term. "This is probably as bad as it's going to get," he said. "Things may be cooking up. We're beginning to see more of the larger deals coming out because of the market's better tone."

Some traders believe that even if the the Federal Open Market Committee decides to tighten credit again at its August meeting, the market will still have room to work with.

"We'll certainly do at least 50% of last July's $24 billion this year," Chamberlin said. "But we are headed back to lower numbers on what the municipal market could consider a more permanent basis."

Securities Data's bond volume figures are preliminary and subject to substantial revision. For instance, on July 1, when they were last published in The Bond Buyer, June's bond volume figures were revised upward by $1.57 billion, to $15.12 billion from $13.55 billion.

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