Over the past six weeks, municipal bond yields have retraced half the distance they dropped between early January and mid-October. It has been a fast retreat, and the dominant view in the markets seems to be that it hasn't ended.

The yield to par call on The Bond Buyer's daily Municipal Bond Index dropped 114 basis points from 6.47% on Jan. 8 to 5.33% on Oct. 15 as bond prices rose for nine straight months. Then, amid concern about a stronger economy and renewed inflationary pressure, municipal bond prices fell back, driving the yield on the index from 5.33% to 5.9 1 % last Wednesday, a climb of 58 basis points.

Even with its decline over the past six weeks, the municipal bond market has had much to be thankful for this year, handling over $300 billion of notes and bonds before Thanksgiving, an amount well above the $277 billion it marketed in all of 1992, the record year until now. Record financing volume and the lowest interest rates in almost 20 years should make everybody happy.

Much of the time since mid-October, the federal government's important economic statistics have exceeded the market's expectations, reinforcing the notion that the business recovery is gaining strength and causing bond prices to slide. The government is scheduled to publish its revised estimate of the nation's gross domestic product on Wednesday, and it, too, is expected to show a good-sized increase over the original 2.8% rate of growth published earlier.

In December and January, however, the economic numbers are likely to become somewhat less impressive, more in tune with the down that corporations and local governments are implementing. When that happens, the drive toward lower bond yields may reassert itself.

Not everyone is so optimistic about bond prices, but Edward Yardeni, chief economist at C.J. Lawrence/Deutsche Bank Securities Corp., said last week that he still expects the 30-year Treasury bond to hit 5% "before the end of next year." He said 61/2% is the "worst case" over the six months ahead. The 30-year Treasury bond traded at a yield of 6.31% last Wednesday, up 53 basis points from its 1993 low of 5.78% on Oct. 15.

Yardeni believes the inflation rate, measured by the consumer price index, will drop to 2% next year, and that the "real" rate of return on. long-term Treasury bonds will stay close to 3%. If this picture of the future for the pace-setting Treasury bond market is accurate, the, municipal market should set volume records in 1994 for the third straight year.

This isn't the current majority view, but it's positive and plausible and in tune with the Thanksgiving season.

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