The bonanza that was supposed to hit the market for tax-exempt municipal bonds as a result of President Clinton's tax changes hasn't happened yet.
Ever since last year about this time, when Clinton emerged as a solid contender for the White House, his push for higher tax rates on upper-income individuals and families has been talked up as a boon to municipal bonds and the mutual funds that invest in those securities.
But the numbers tell a less dramatic story. According to data published by the Investment Company Institute, the combined assets of national and single-state municipal-bond funds climbed from $182.68 billion at the end of July 1992 to $234.12 billion by July 31 this year.
But that 28.16% growth was actually smaller than the 30.21% aggregate increase posted by all bond and income funds, including those that invest in government and corporate bonds, both of which pay interest that is subject to federal income tax.
Neither does the vaunted increase in demand for municipals show up in any unusual performance by the tax-free funds.
As a group, 226 national municipal bond funds tracked by the Morningstar Mutual Fund Performance Report in Chicago recorded a total return of 7.78% for the year ended July 31, benefiting from the broad decline in interest rates.
Yet in the markets for taxable securities, general government bond funds, up 8.53%, and general corporate bonds, up 10.23%, both did better.
What gives? Well, analysts say, those numbers don't tell the whole story. Many investing institutions, who represent a big part of the modern markets, don't buy municipal bonds or municipal-bond funds at all because they don't pay current taxes.
Municipals are also excluded from the huge and growing retirement savings market in vehicles like individual retirement accounts and 401(k) plans, because those programs have their own distinct tax breaks.
Within the municipal market itself, analysts say price gains have been limited by a heavy supply of new offerings.
"Most of the issuance in 1993 has not represented new obligations for municipalities," say analysts at Merrill Lynch. "Rather, it has gone to refinance existing debt at a lower rate.
"The usual means of refinancing is through a pre-refunding, which involves issuing a new security at a lower rate while the existing security remains in the market until it is eligible to be called.
"So the current huge pace of refundings virtually assures that an enormous number of issues will be retired in the coming years," Merrill Lynch concludes. Such a reduction in supply would stand to work in favor of bond prices.
In the meantime, municipal bond advocates point out, an absence of runaway market strength means that attractive yields can still be found in the current municipal market.
As of early September, the Bond Buyer municipal bond index stood at a yield of 5.55%--equivalent to a pretax yield of 7.71% for someone in the 28% bracket.
Yields available on taxable corporate bonds, meanwhile, stood at 6.7% to 7.2%, as reflected in indexes calculated by Barron's magazine.
Thus, there is a yield advantage on paper of one-half to one percentage point to be gained in municipals, even for 28%-bracket individuals whose taxes weren't increased at all by the Clinton plan.
Some further surprising information about municipal bond investing: Although municipal bonds seemingly have their greatest appeal to people with the highest incomes, many rich people don't buy them--and quite a few non-wealthy people do.
In 1991, the latest year for which data are available, the Public Securities Assn. reports that "only a small percentage of investors with adjusted gross incomes over $75,000 actually own tax-exempt munis."
Among all taxpayers who did report tax-exempt income in 1991, almost half--48.3%--had adjusted gross incomes of less than $50,000.