Tax-exempt prices thrust higher yesterday, boosted by passage of President Clinton's budget last week.
Municipal players took prices sharply higher at the opening, inspired by the approval of the new budget on Friday evening, which includes higher taxes, traders said.
The Treasury market also rallied, with the 30-year bond hitting a new record low of 6.45% during the afternoon. The government rally contributed to tax-free gains, as did lighter municipal supply.
The September municipal futures contract led gainers, muscling one point higher to settle at 102.31.
The MOB spread narrowed to negative 416 from negative 426 Friday. The Spread is likely to narrow even more, traders said, because the Treasury market faces $38.5 billion of refunding this week.
The auction begins today with the sale of $16.5 billion three-year notes, followed by $11 billion 10-year notes tomorrow, and $11 billion of 30-year bonds on Thursday.
Trading in the tax-exempt cash market was called moderate overall and prices closed 1/2 to 3/4 point higher on average.
High-grade bond prices were said to be 5/8 point higher across-the-board. But some dollar bonds were quoted 7/8 to one point higher on the day.
For example, Philadelphia Water MBIA 5 1/4 were quoted late yesterday at 5.66% bid, 5.62% offered, compared to Friday's close of 5.72% bid, 5.71% offered.
In other active trading, Washington Public Power Supply System MBIA 5.70s of 2014 were quoted at 99 1/4-3/8 to yield 5.75%, where they were bid at 98 3/8 to yield 5.82% Friday.
In follow-through business, Lehman Brothers freed $486 million Jacksonville Electric Authority St. Johns River Power Park Systems refunding revenue bonds to trade.
Reflecting the strength in the secondary market, the 5 1/2s of 2013 were quoted at 99-1/8 to yield 5.58%, where they were originally priced to yield 5.65%.
Some market players reported a dearth of activity and hesitancy on the part of buyers, but others were more bullish.
"We were waiting for this after setting up last week," said one trader. "There were a lot of size trades last week, and you could feel the momentum build. People are defensive, but the market seems poised to do better."
New issues sold at a brisk pace yesterday. Merrill Lynch & Co., senior manager for $175 million Illinois general obligation bonds reported all bonds sold and the account closed.
The Blue List of secondary dealer inventory for sale fell $72 million, to $1.64 billion, the lowest level since July 1, when it was $1.63 billion. The list has now fallen $330 million in the past three business days, from $1.97 billion on Aug. 4.
Looking ahead to supply, The Bond Buyer calculated 30-day visible at $5.96 billion, down from $6.45 billion Friday.
In light new issue activity, Merrill Lynch priced and restructured $430 million New York State Dormitory Authority State University Educational Facilities revenue bonds.
Merrill Lynch reported the account closed late in the day at the original price levels. But, the amount was boosted from $405 million and a 2011 maturity was added.
A Merrill officer said the deal saw a mix of institutional and Street demand at what he termed "aggressive price levels."
The final reoffering include serial bonds priced to yield from 3.50% in 195 to 5.69% in 2011. A 2013 term was priced as 5 1/2s to yield 5.70% and a 2019 term, containing $67 million of the offering, was priced as 5 1/4 to yield 5.75%.
The bonds are rated Baal by Moody's Investors Service and BBB-plus by Standard & Poor's Corp.
In other action, Prudential Securities as senior manager price $82 million Monroe County, N.Y., GO public improvement bonds.
Non-callable serial bonds were priced to yield from 2.80% in 1994 to 5.40% in 2011. Non-callable zero coupon bonds were priced to yield from 3.45% in 1995 to 5.45% in 2013.
The bonds are insured by the AMBAC Indemnity Corp., and rated triple-A by Moody's and Standard & Poor's
In secondary action, traders reported a moderate business flow but some sizable blocks of bonds were said to change hands.
Among the largest, traders said, was a block of $17 million Michigan Public Power 5 1/2s of 2013, which were said to have traded around 5.60%, less 1/4.
In secondary dollar bond trading PICA MBIA 5 5/8s of 2023 were quoted at 98 1/2-bid to yield 5.73%; Cook County, Ill., MBIA 5 3/8s of 2018 were quoted at 5.71% bid, 5.68% offered; and Fulton DeKalb County, Ga., Hospital Authority MBIA 5 1/2s of 2020 were quoted at 5.71% bid, 5.66% offered.
In short-term note trading, yields were three five basis points lower on average, traders said.
In late action, California notes were quoted at 2.92% bid, 2.88% offered; New York State notes were quoted at 2.55% bid, 2.50% offered and Wisconsin notes were quoted at 2.88% bid, 2.85% offered.