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 /NOTE TO EDITORS: This report was authored by James J. Cooner,

senior vice president of the Bank of New York/
 NEW YORK, Aug. 6 /PRNewswire/ -- That's the question the municipal bond market has been asking. July 1st saw the largest call of tax exempt bonds in history when an estimated $10 billion were called. States and municipalities simply took advantage of declining interest rates to refinance higher coupon bonds with bonds bearing substantially lower rates. For the first seven months of 1992, a total of $118 billion of tax exempt bonds were issued. Of these, 47 percent were issued for refunding purposes. (This compares with 30 percent for calendar year 1991 and 22 percent for 1990.)
 Holders of municipal bonds, having seen their bonds called, now face the problem of where to reinvest in a totally different interest rate environment. In 1982, tax exempt returns of 12 percent or more were readily available; today, the investor must be content with maximum returns of approximately 6 percent.
 Where did the money go that was received from called municipal bonds? Despite the lower interest rate environment, I believe most of the money was recycled into municipal bonds. Today individuals seeking tax sheltered investments have fewer options than in the past. Legislation has closed or greatly restricted most tax shelters. Municipal bonds remain the exception for investors seeking tax relief.
 One method of verifying the assumption that the funds were reinvested in municipals is to chart the relative change in yields of municipal bonds versus bonds in general. Treasuries are an excellent benchmark since the Treasury bond market is the largest and most important bond market in the world.
 At the beginning of 1992, 30-year top quality triple-A rated municipal bonds yielded approximately 86 percent of the return on long term U.S. Treasuries (6.45 percent for municipals versus 7.50 percent for Treasuries). Recently this relationship has changed: today the yield of 30-year top quality municipals has dropped to 78 percent of long term Treasuries (5.80 percent versus 7.44 percent).
 This relative decline indicates the strength of municipals. Compared to the start of the year, investors receive a reduced relative return from municipals compared to Treasuries. This reduced return from municipals is most likely due to the extra funds from called bonds recycling into the municipal bond market.
 Additional heavy bond calls can be expected over the next few years. Interest rates would have to rise substantially to diminish refunding activity by states and municipalities. We think that would be an unlikely scenario given the current economic situation. Therefore, expect more bond calls and a strong municipal bond market.
 What are the key points to consider if you are making investments today in municipal bonds? Given that we are at the low end of the interest rate cycle, I recommend staying in the 7- to 10-year maturity range. This intermediate maturity range provides about 85 percent of the return obtainable from 30-year bonds without exposing the investor to possible principal loss, should interest rates start to increase. Also stay with higher quality. The spread between high quality and lower quality municipal bonds is very narrow in today's market. Therefore the investor is not properly compensated for taking on the risk of lower quality bonds.
 -0- 8/6/92
 /CONTACT: Rick Stockton or Steve Bruce of the Abernathy MacGregor Group, 212-371-5999, for the Bank of New York/
 (BK) CO: The Bank of New York ST: New York IN: FIN SU: ECO

SH-GK -- NY017 -- 7455 08/06/92 09:30 EDT
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Date:Aug 6, 1992

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