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BANK OF NEW YORK: MUNICIPAL BONDS IN 1994 -- A SQUEEZE ON SUPPLY

 NEW YORK, Dec. 9 /PRNewswire/ -- The following was authored by James J. Cooner, senior vice president of Bank of New York (NYSE: BK) and manager of the tax exempt bond division:
 Existing volume figures for the sale of newly issued municipal bonds will be shattered in 1993. Through November of this year a total of $261 billion municipal bonds has been sold by states and municipalities. The corresponding number for the calendar year 1992 was $212 billion. The total bond sales for this year should be approximately $275 billion. This will exceed the $235 billion that were sold in 1992 -- and 1992 had been a record year.
 What about 1994? Looking forward, The Bank of New York believes that municipal bond sales should be less in 1994 than in 1993. The expected reduction in the supply of newly issued tax exempt bonds has definite implications for investors seeking tax free income.
 There are two main reasons why the supply of bonds in 1994 will be less than this year's supply. Both reasons are related to the refunding activity that has taken place by states and municipalities over the last few years.
 In the same way as the downwards drift in interest rates over the past few years has been an inducement for individuals to refinance their mortgages, the trend towards lower interest rates has been an inducement for municipalities to call their bonds. Few municipal bond holders have escaped the bond calls that have unfavorable impacted their portfolios. Many investors have seen dramatic changes in the structure of their portfolios as high coupon bonds have been involuntarily called away from them. I believe that the vast majority of municipal bonds that are subject to potential call have been either called or prerefunded. Therefore, the relative number of bonds that could be called in the future is not as large as had been the case in the past.
 The other important factor influencing bond calls is the direction of interest rates. As rates have drifted downward, more and more bonds have become candidates for call, in the same fashion as the reduction in interest rates made more and more home mortgages subject to refinancing activity. The reduction in interest rates brought more and more municipal bonds in as candidates for call. Assuming that we will not see further substantial reductions in interest rates, the universe of potential new candidates of municipal bonds to be called will be diminished.
 Sixty-six percent of all the bonds that have been sold so far this year have been for refunding purposes. More than half of all the bonds that were sold in 1992 were sold for refinancing purposes. These huge numbers of bonds sold for refinancing purposes will be diminished as we go forward into 1994. The reduction of refinancing activity in turn will reduce overall bond issuance.
 Another important factor in the municipal bond market will be the increase in the demand for tax exempt bonds. As we enter 1994, the higher federal tax rates will really start to cut. The increased tax rate will be reflected in higher withholding payments for salaried employees. Higher tax rates will be reflected in higher quarterly payments. Most importantly higher tax rates will be reflected in March and April as taxpayers sign off on their 1040 returns for calendar year 1993. We all know taxes have increased, but the fact will become much more dramatic as we enter the first quarter of 1994. This increase in taxes can only stimulate greater demand for tax free bonds.
 The combination of reduced supply in 1994 and increased demand due to higher taxes bodes well for tax exempt bonds. The municipal sector should be one of the better performing fixed income sectors next year. Investors are advised to make commitments in today's more favorable market environment.
 I recommend the intermediate range, with bonds maturing between 6 and 10 years. This range provides excellent returns while limiting exposure to interest rate risk. Investors also should tilt towards higher rated bonds since the spread between bonds of different quality continues to be modest.
 Forthcoming issuers that represent good value include:
 -- New York State Thruway Authority
 -- Municipal Electric Authority of Georgia
 -- Massachusetts Water Pollution Abatement Trust
 -0- 12/9/93
 /CONTACT: James J. Cooner, senior vice president of Bank of New York and manager of tax exempt bond division, 212-635-6918; or Steve Bruce or Rick Stockton of Abernathy MacGregor Scanlon, 212-371-5999/
 (BK)


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

WB -- NY051 -- 2237 12/09/93 13:17 EST
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Date:Dec 9, 1993
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