The Impact of Relative Security Supplies: A Test with Data from a Regional Tax-Exempt Bond Market

WHETHER CHANGES IN RELATIVE SECURITY SUPPLIES have an impact on relative interest rates is a matter of much debate. Some contend that efficient markets prevent more than a momentary impact, and others (e.g. [4] ) argue that severe market segmentation exists virtually everywhere. The answer to this query, it seems to us, depends greatly on the markets being considered. If the question is phrased in terms of the impact of changes in long-term federal debt on the relationship between yields on new issue U.S. government and high-quality corporate debt of equal maturity, then we would expect the impact to be minimal.1 These instruments would seem to be close substitutes in too many portfolios for a significant impact to exist more than momentarily. On the other hand, where debt instruments are taxed quite differently or where government regulations prevent shifts of substantial investors between instruments, a case can likely be made for significant market segmentation. One such case involves the market for tax-exempt debt of state and local governments. Moreover, within this market geographic and regional factors