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'1997, A Muni New Year!' A Report by James J. Cooner, Senior Vice President, Bank of New York, Tax-Exempt Bond Management Department

NEW YORK, Nov. 25 /PRNewswire/ -- Following is "1997, A Muni New Year!", a report by James J. Cooner, Senior Vice President, Bank of New York, Tax-Exempt Bond Management Department:

After a stay in the doldrums that lasted several years, municipal bonds will rebound with a vengeance in 1997! The news is all good, both for investors seeking tax-exempt securities and for states and municipalities in need of funds to finance vital projects.

The results of the November 5th election certainly gave reason for optimism. Along with their choices for political candidates, voters across the nation approved more than $10 billion in municipal bond authorizations! That's the second-largest amount ever given a go-ahead in a single day. The upbeat news did much to shake off the negativity that has long hovered over the muni marketplace -- a negativity fueled by the widely-publicized Orange County (Cal.) default, a diminished supply of new issues, and the possibility of radical Tax Code changes that would adversely affect investors.

Looking at that $10-billion from another angle, it represents 70% of all bond authorizations on the ballots. And, of the 30% of issues that were turned down, the bulk of the total amount of money involved was for a single proposal in California. Quite obviously, the electorate today is positively disposed to borrowing to finance new and much-needed projects -- whether they're to improve the infrastructure, take care of environmental concerns, or expand services and facilities.

Good Supply, Good Demand. It's easy -- with those newly authorized billions in the picture -- to forecast that long-term bond issuance next year will total approximately $200 billion, up from an estimated $165 billion for 1996. It's the first meaningful increase in new bond issues in three years. And it might be just in time: Infrastructure-rebuilding programs that have been in cold storage in many areas become more urgent with each passing month. So the need for more long-term financing grows in proportion.

As the supply of muni bonds increases, another factor should help heighten investors' demand for them: The heavy municipal-bond calls that took place as states and communities sought to capitalize on lower interest rates are a thing of the past. Most bonds that could be called have already been called, leaving many investors with cash that they're anxious to put back into the tax-exempt market.

Sound Financial Footing. As to credit quality, states and municipalities generally are in better financial condition today than they have been in recent years. Tax collections have been favorable, revenue outlays well- controlled. As a result of an improved credit picture, bonds trade with only modest yield spreads between the various major quality grades. An example: The spread between AAA-rated bonds and A-rated bonds is only about 15 basis points for a ten-year maturity.

For the investor, a narrow spread means that there is only a slight decline in yield when a high-quality bond is chosen over a lesser one. Still, caution should be exercised in two areas: electric utilities and hospital facilities. The utilities, both public and private, will be under pressure from deregulation that gives competition a boost. And hospitals should be viewed in the light of numerous and far-reaching changes in the health-care industry.

Insurance a Plus. Investors benefit, too, from the fact that nearly half of all newly issued bonds come to market with insurance against default. In today's market, the yield on AAA insured bonds is generally higher than the yield on AA uninsured bonds. The municipal market tends to price all insured bonds of similar maturity with equal yields -- regardless of the actual name of the bond issuer. Because negative news about any bond issuer tends to reduce the value of all of its bonds, whether they're insured or uninsured, investors should look first at issues by municipalities with strong underlying credit quality. And from those issuers, choose insured bonds.

With improved supply, the outlook for interest rates holding positive, and no tax changes coming from the 105th Congress to adversely affect their investor-value, we firmly predict that 1997 will be a good year -- dare we say a Happy New Year? -- for municipals.

By: James J. Cooner, Senior Vice President
 Bank of New York
 Manager, Tax Exempt Bond Division

SOURCE Bank of New York
 -0- 11/25/96

/CONTACT: Janet Stoner, Vice President of Bank of New York, 212-495-1725; or Steve Bruce or Catherine Giller of Abernathy MacGregor Group Inc., 212-371-5999/


CO: Bank of New York ST: New York IN: FIN SU: ECO

MP -- NYM079 -- 3648 11/25/96 10:48 EST
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Publication:PR Newswire
Date:Nov 25, 1996
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