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MUNI BOND CALLS -- THE FAT LADY HASN'T SUNG YET

 NEW YORK, Jan. 5 /PRNewswire/ -- The following was released today by James J. Dooner, senior vice president of the Bank of New York and manager of the Tax Exempt Bond Division:
 During 1992, the municipal bond investor faced wave after wave of bond calls. States and municipalities sold about $95 billion of tax exempt bonds just to call outstanding, high interest bearing obligations that were sold a decade ago. For example, at the end of 1982, long term tax exempt yields were close to 11 percent; by the end of 1992, comparable yields had dropped to 6.25 percent. These calls created a pair of problems for bond holders -- the problem of suddenly having to reinvest the proceeds from the calls and the problem of decidedly smaller returns on reinvested capital due to a lower interest rate environment.
 How about the future? Unfortunately, states and municipalities will continue to call massive amounts of bonds in 1993, 1994, and 1995. And so, the problem of reinvesting in a low interest rate environment will also continue.
 Issuers of tax exempt bonds will call approximately $45 billion in 1993, $50 billion in 1994, and $65 billion in 1995. These calls -- added to the bonds called in 1992 -- will pull about $250 billion from investors' muni bond portfolios. To put this $250 billion of called bonds in perspective, consider that this number is approximately twice the number of all newly issued municipal bonds sold in 1990.
 Where will these funds go? I believe most of the money will be reinvested in municipal bonds -- despite the lower interest rate environment. The municipal bond represents the last remaining way of generating currently available tax free income from a marketable, liquid investment.
 Tax rates are going up. The question is "how soon" and "how far." At a 36 percent federal tax rate, a 6 percent yield on a municipal bond equals a bond yielding 9-3/8 percent subject to federal taxation. The potential value of avoiding state and local taxes makes a municipal bond even more valuable.
 I would advise investing in the 7 to 10 year maturity range. The yield curve is "flat" beyond the 10 year maturity. There is little additional pickup for investing beyond 10 years, but there is decidedly added risk should interest rates move upward.
 Furthermore, I would tilt any new investments towards higher quality bonds. The spread in yields between higher quality (i.e. "AAA" or "AA" rated) and intermediate quality (i.e. "A" or "BBB" rated) is modest. For example, in today's market, 10 year "AA" rated bonds yield approximately 5.60 percent while 10 year "A" rated bonds yield approximately 5.80 percent, a very modest 20 basis point difference. For this difference, I would choose the higher quality bonds.
 I would recommend the following forthcoming municipal bond issues as having both high quality and good returns:
 -- Jacksonville, Fla., Excise Tax Revenues
 -- Los Angeles Department of Water & Power
 -- Prince Georges' County, Md.
 -- Seattle, WS, Utility Revenues
 -- Texas Municipal Power Agency
 -- Univ of Michigan, Hospital Revenues
 -0- 1/5/93
 /CONTACT: Steve Bruce or Rick Stockton of Abernathy MacGregor Group Inc., 212-371-5999, for the Bank of New York/
 (BK)


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

LR -- NY067 -- 1827 01/05/93 14:43 EST
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Publication:PR Newswire
Date:Jan 5, 1993
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