For all practical purposes, the bond markets have been treading water for the past several weeks. They have been awaiting news, whether it be economic or financial, that would give a direction to interest rates and hence to bond prices. As so often happens in such a void, technical factors come into play that will move the markets.

Because the debt ceiling has not been raised by Congress, there has been no new coupon issues since the two-year note was auctioned on Sept. 18. The lack of supply has left the Treasury market dull, with most of the activity coming from professionals with little retail involvement. On the other hand, the municipal market has been led mostly by technical considerations.

The table points out several of these interesting facts. First, is the importance of new-issue weekly volume. From mid-September to Oct.4, the weekly volume of new issues grew. At the same time, both of the bond buyers' indices also rose under the weight of the new-issue calendar, and both began to decline as the new-issue volume receded from its $3.12 billion peak. But there were two other related technical factors at work.

Because of the immense volume of new issues, underwriters had to price the new issues attractively so that they would be purchased. The cheaper issues created a strong demand from banks, fire and casualty insurance companies, mutual funds and individuals. At the same time, the "old" merchandise that dealers had on their shelves -- their inventory -- had to be "cheapened" to compete with the new issues. As this occurred, the dealers' inventory, as reflected in the blue list volume, began to decline, which freed up more of the dealers' funds for underwriting and trading.

Concurrently, from Sept. 20 on, as the revenue bond index rose, the yield on the 30-year T bond declined. As a result, the ratio of the yields on tax-exempt revenues to the 30-year T bonds began to rise. This meant that the tax-exempt returns were moving higher when compared to returns on 30-year taxable T bonds. Because a more attractive tax-exempt yield was available, buyers stepped in and purchased the new issues as well as the secondary inventory. As the new-issue volume declined during the last two weeks, the demand for tax-exempts remained, so that tax-exempt yields, as reflected in the two indices, fell, as did the inventory as shown in the blue list volume. All technical factors, but now the 30-day visible supply has climbed to more than $5.0 billion. It remains to be seen if tax-exempt rates will rise again, or if other factors will influence the direction of tax-exempt yields.

The Treasury will offer a two-year note on Wednesday in minimum denominations of $5,000. They should return around 8.85 percent.