With steadily rising prices and strong demand from investors, the municipal bond market has much to be thankful for this month. Just over the horizon, however, a heap of trouble lies ahead.

Bond prices have climbed for three weeks even in the face of heavy volume, and investors have stepped up to buy bonds at yield perhaps 35 basis points lower than they were late in October. It's hard to know why exactly the fixed-income market ended a two-month slide and became more optimistic, but it did.

That slide in prices in the bond market lasted from late July to late October, and the chief explanation was that Gov. Bill Clinton of Arkansas seemed more and more likely to win, a victory that would bring the tax-and-spend Democrats back to power. That change supposedly would be bad for bonds even though the tax-and-spend record of the Bush administration coincided with a very good performance for bonds. Perhaps, in the end, the bond market collectively realized that it was worrying too much about a phantom and that bond yields might have moved up too far.

Shortly before Clinton's victory on Nov. 3, the bond market turned. Prices began to advance and investors began to accept lower yields on a large volume of new bonds. What was impressive was that they bought bonds in the face of this heavy volume and despite signs that the sluggish economic recovery was gaining some strength, evidence that ordinarily might make bond investors cautious.

Most likely, the credit markets will now pause. As Carol Stone, senior economist at Nomura Securities, told Susan Kelly of The Bond Buyer last week: "I don't see any reason for the bond market to move one way or the other. In coming weeks it's just a waiting game until we see who shows up in the administration and details of Clinton's economic proposals."

Before too long, though, the credit markets will be faced with a crunch of worrisome news from Washington on the federal budget, the deficit, and a jobs program. As Congressional Quarterly pointed out, "growing" the economy and reducing the deficit make a collision likely sooner or later, "but the calendar guarantees trouble almost immediately."

Sometime after mid-February, the federal government will hit the current debt ceiling, set in 1990, of $4.1 trillion. At that point, the Treasury will no longer be able to sell additional securities, and Congress, soon to be filled with more serious debt reducers, will face a difficult debate. Because of the debt ceiling, Washington cannot evade deficit reduction early in 1993, and that assures an arduous, perplexing period ahead for anyone interested in making decisions about bonds.

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