G. Rolf Svendsen of Dain Bosworth

With long-term municipal yields likely to fall under 5% by year-end, retail demand for municipal bonds will depend heavily upon how quickly investors overcome the accompanying rate shock, according to G. Rolf Svendsen, a broker with Dain Bosworth Inc. in Minneapolis.

"Some day a psychologist will figure out how many times you need to see a 5% yield instead of 6%, or a 4% yield instead of 5%, before they get accustomed to it," he said. "Eventually, if these levels hang around for a little while, all of a sudden they look attractive."

Svendsen believes the stock market is due for at least a slight correction, and that would likely enhance the appeal of municipal bonds and other fixed-income investments.

He also predicts that the flat tax will fade from serious discussions about tax reform.

"Nobody's talking about (the flat tax) anymore," Svendsen said of his clients. "My personal view is that the flat tax is only going to affect the market if it becomes the major political question of the 1996 election. And even if that happened, I just don't think it is feasible."

Despite his dismissal of the flat tax threat, Svendsen believes the ratio of municipal to Treasury yields will remain high.

"I think we're going to see more product this year, because if rates do go down, we're going to see a lot more refundings," he said. Thus, supply- and-demand fundamentals will keep municipals cheap.

- Jon Birger