Prices respond ringingly when Fed does what market wants.

Municipal prices soared yesterday as the Federal Reserve delivered 50-basis-point increases in both the federal funds and discount rates.

"It think it's exactly what the market wanted," one municipal trader said. "We're relieved," another trader said.

Other possibilities had included a 25 basis point hike in fed funds or no action at all.

Dollar bond prices ended a point to 1 3/8 points higher after the Fed's action, market participants said. Yields on high-grade issues fell by 10 basis points overall. Activity was light to moderate.

A municipal analyst added that today's competitive deals by Maryland, which is offering $120 million of bonds, and Wisconsin, which is offering $110 million, should serve as barometers of where the high-grade market is.

In late secondary dollar bond trading, Tacoma, Wash., Electric FGIC 6 1/4s of 2015 were quoted at 6.34% bid, 6.30% offered, while RTA AMBAC 6 1/4s of 2024 were quoted 6.43% bid, no offer.

In debt futures, the June municipal contract closed up 1 3/8 at 91 7/8. Yesterday's June MOB spread was negative 424, up from negative 421 Monday.

In another response to the Fed actions, a third trader said the central bank did well to bump up the fed funds rate as sharply as it. It means, he said that the market doesn't have to worry about when the next 25 basis point move will occur.

"It's marvelous," Robert W. Chamberlain, a senior vice president and director of municipal research at Dean Witter Reynolds Inc., said of the Fed's move. "I hope it inspires somebody to come out and borrow money."

The rate increases and the increased stability they should bring to the market are likely to bring in issuers who have been sidelined by recent market turbulence, he said.

"The hard part of this is that we just don't know how big that group is," Chamberlain said.

"I think our market has probably got more at stake on this, with due respect to the federal government, than any other segment" he said.

Between June 1 and July 1, some $70 billion of supply will flow out of the municipal market in the form of calls of redemptions, Chamberlain said.

While low supply is technically good for the market because it drives prices up, eventually the higher levels create retail resistance and disorganized results.

New issue volume has fallen off by 34% so far this year, with the first four months totaling $59.34 billion compared to $89.42 billion for the same period a year ago. Issuers sold a record $290.94 billion of bonds in all of 1993.

In that light, the $70 billion exiting the market is significant, Chamberlain said. The next 30 to 45 days will be crucial, he said, as the scenario plays itself out. It will take that much time "because a lot of small issuers don't turn around on a dime."

Bill Veronda, portfolio manager of the $300 million INVESCO Tax-Free Long-Term Bond Fund, among other INVESCO Funds Group portfolios, said he's not holding any bonds that are being called during June and July.

He also doesn't see a big supply dearth ahead because now that the Fed has moved, issuers who shelved offerings are likely to come in, Veronda said.

The Fed isn't likely to move again until the July 5 Federal Open Market Committee meeting, so that removes a source of uncertainty from the market, he said.

Veronda also said he would probably continue his program of buying shorter, lower quality paper.

Lesser quality credits are a part of his "defensive" strategy, Veronda said. In a strengthening economy they tend to hold up better relative to other credits. Such bonds have more room for improvement, he said.

In the primary market yesterday, a Smith Barney Shearson group priced and repriced $95 million Honolulu, Hawaii City and County general obligation bonds. At the repricing, yields were lowered by 2 1/2 basis points in the 2013 and 2014 maturities. The final offering had a top yield of 6.225% in 2014.

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