Unequivocally, the best place to invest in the tax-exempt market this year has been New York single-state funds.

Seven out of the 10 best performing municipal bond funds for the first nine months of the year were New York funds, which give instate investors returns free of state and local income taxes. The top 10 New York funds conferred total returns averaging 10.82% during the period, according to Lipper Analytical Services Inc.

No other state came close to New York. And, by comparison, the other major groupings of municipal fund trailed. The top 10 general bond funds averaged a 10.26% total return; the top 10 high yield funds averaged 9.24%; and the 10 best performing insured bond funds returned 8.45%.

Tax-exempt portfolio managers attributed the New York sector's strong performance to secondary-market insurance opportunities and price appreciation in the second and third quarters of 1991. Debt from New York City, in particular, has soared since late May.

"All the city names with longer durations did well," said Paul Disdier, portfolio manager of the Premier New York Muni Bond Fund. "If you bought them in the spring, you'd have almost a 100-basis-point move in the past six months."

The $560 million New York City general obligation issue in early June was initially priced with a 8.60% yield, Mr. Disdier said. The same bonds are now priced to yield about 7.70%.

The number one fund was the New York Muni Fund, which is managed by Lance Brofman, chief portfolio strategist for Fundamental Inc. The fund, totaling $180.3 million, made an enormous leap in the third quarter, returning 8.15% in three months.

The gains resulted almost exclusively from one grand trading maneuver. Mr. Brofman scooped up as much New York City paper as he could when the bond insurers were at capacity and not guaranteeing any more of the Big Apple's debt. Then, when the insurers began to make more capacity available to the secondary market, he insured the bonds and sold them.

"We bought a whole bunch of New York Citys when they were not insurable," Mr. Brofman said. After AMBAC Indemnity Corp. freed up capacity, "it cost $60 a bond in insure them, and they were worth $95 a bond after insurance; three and a half points is not bad."

The New York State Insurance Commission restricts the amount of any one credit bond insurers can enhance. New York City's bonds, because of yields, liquidity, and credit quality, are very attractive to the insurers, leading to market periods when both primary and secondary insurance is not available to bondholders.

The New York Muni Fund managed to get a larger stake than normal in New York City bonds by acquiring various dealers' allotments, he said. The fund is not allowed to have more than 25% of its assets in one credit, and Mr. Brofman now has a full quarter in New York City paper.

Apart from the insurance play, and exploiting temporary differences between bonds insured by different insurers, Federal Housing Administration-insured bonds were "cheap" in the second quarter and most other New York securities gained, he said.

"After they passed the state budget, that absurdity was lifted from the market and all the New York funds did particularly well," Mr. Brofman said. "The only [New York funds] that did not do as well were in Puerto Rico bonds through the third quarter. We swapped out of Puerto Rico and into New York paper and got a couple more points."

Mr. Disdier of Dreyfuss said the Premier New York Fund, which ranked second, owed its total return to a hefty serving of discount bonds, or issues sold at a discount to par with low or nonexistent coupons.

"We probably bought the discounts too early last year," he said, "but they're paying off now."

Almost 10% of the portfolio, he added, is comprised of noncallable issues, discount bonds, and zero coupons.

The fund's assets currently total $65 million, which is fairly small by national standards. Mr. Disdier said the small size is advantageous under certain circumstances, but it is a two-edged sword.

"Whatever you do in a smaller fund, it's going to have a little more impact," he said. "A $1 million block can help you or hurt you" more than it would a larger fund.

The only funds to break into the New York supremacy were three general municipal bond funds, which invest in tax-exempts from around the nation. Noticeably absent from the best performers were high-yield funds, other states, and insured funds.

The best insured fund in the group, not surprisingly, was a New York insured portfolio. The Nuveen Insured Tax-Free Bond: New York fund racked up 10.14% in total returns, according to Lipper, putting it on a pace to yield 13.52%. Every security in the fund is either insured before purchase or covered by a "master portfolio policy" underwritten by Municipal Bond Investors Assurance Corp., according to a Nuveen spokesman.

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