The first half of 1985 has been quite a period for the tax-exempt sector of the bond market. The volume of new issues with maturities longer than one year was $53.3 billion, up a whopping 60.3 percent over the $33.3 billion marketed during the similar time frame in 1984.

During the same period, tax-exempt yields on general obligation bonds, as measured by the Bond Buyers' 20 Bond Index, declined 116 basis points. A basis point is one-hundreth of a percentage point. At the same time, the longer revenue bond issues, as measured by the Bond Buyers' Revenue Bond Index, has declined 121 basis points. This sizable reduction in interest rates motivated many issuers to bring new issues to market. Further, the drop in rates also has enabled many issuers to refund, with lower interest rates, outstanding issues that were marketed during periods of much higher interest rates. Underwriters suggest that there has to be an interest rate decline of at least 150 basis points before such an undertaking is feasible. Consequently, it should come as no surprise that the largest category of financings during the first half of 1985 was $15.4 billion of refundings -- 29 percent of the total amount. The other sizable categories were $9.9 billion public power, 19 percent; $9.5 billion housing issues, 18 percent; and $4.4 billion hospital issues, 8 percent.

Aside from the huge volume of new issues and the large swing in interest rates during the first six months, two other noteworthy events occurred. First, for the first time in several years, one of the three main buyers of tax-exempts -- fire and casulty insurance companies -- returned to the marketplace. They purchased about $500 million of municipals in all of 1984, and analysts feel that they have purchased much more than that during 1985. The increased premiums to these insurance companies is beginning to make the purchases of tax-frees important for them once again. But most analysts feel it will be 1986 before they are back in full force.

The second noteworthy event was the introduction of the municipal futures contract on June 11 for trading on the Chicago Board of Trade. This will enable underwriters to hedge, or protect, their large underwriting positions against price declines, and the contract also will enable dealers to carry much larger bond positions for trading than before. Many in the municipal industry have high hopes for this new futures instrument, but it will take time to see just how effective it really will be.

As to the second half of 1985, the tax-free market is starting with a huge calendar of new issues and large positions of unsold inventory. In fact, the $4.4 billion 30-day forward calendar is now 36.8 percent above its 250-day moving average. When the 30-day forward supply is added to the unsold inventory as shown in the Blue List, we have the largest overhang of issues on the municipal market -- $6.4 billion -- since May 1983.

Because of the glut in the market, it will take either a stronger performance in the taxable Treasury market and/or lower prices on higher yields in the muni market to break the logjam. At the same time, the market has one eye on the proposed tax reform program. Should there be any signs of passage, with the proposed elimination of private-purpose and refunding issues, the marketplace could be flooded with that type of financing in an effort to beat the cutoff date. Nineteen eighty-five could be the biggest municipal financing year of them all.