The credit markets' week-long surge sputtered abruptly yesterday, although municipals lagged a sharp sell-off in the Treasury market.

Government prices began to decline in overnight trading on a rumor that a U.S. House panel is discussing a possible witholding tax on interest to foreign investors, traders said.

Losses accelerated soon after the opening in the New York, when economic indicators showed some strength.

The ABC/Money Magazine consumer comfort index rose to negative 36, a 13-week high, the Mortgage Bankers Association's index on mortgage activity surged to 1616.6 from 1433.2, and the purchases index rose to 189.5 from 176.2. Finally, initial state unemployment insurance claims fell 10,000 to a seasonally adjusted 316,000 in the week ended Sept. 4.

Yields rose all along the curve, and by mid-morning the long bond had declined one point to yield 5.92%.

It appeared there were enough buyers to stabilize the Treasury market by mid-session. But players were disappointed that the market did not rebound, sparking a late round of selling that pushed the long bond to 5.96%.

Municipal players, meanwhile, marked bonds down 1/8 to 1/4 on average during the morning. But bonds posted losses of 1/2 to 3/4 point by session's end. Some active dollar bonds were off as much as one point. For example, widely traded Florida State Board of Education 5 1/4s of 2023 were quoted at 98 5/8-bid to yield 5.34%. where the bonds were quoted at 99 5/8-bid to yield 5.27% Wednesday.

In the debt futures market, the December municipal contract settled at the lows, falling 22/32 to 104.22. The MOB spread narrowed considerably, moving to negative 461 from negative 484 Wednesday.

The general consensus, traders said, was that yesterday's losses represented a correction after a big run-up, and not a trend reversal.

"People think the Treasury market's move is just a temporary correction and they're not convinced it's a market turn," one trader said.

Although the tax-exempt market fared better than Treasuries yesterday and a bounce is anticipated, several traders predicted the correction would likely be more painful and long lasting than the general consensus.

"The market needed a rest, but it caught people off guard yesterday." a trader said. "I wouldn't be surprised to see this correction go a little deeper. We're hearing that deals did not see much going away business.

Forward supply and dealer holdings were still at low levels yesterday, a plus for the market.

The Bond Buyer calculated 30-day visible supply at $3.27 billion, while The Blue List fell $108 million to $874 million. The list is down $354 million from last Friday and has not been as low since July 30, 1992, when it totaled $747 million.

New Deals

Market players said buyers generally gave a lukewarm reception to yesterday's new issues, and they said that the Street will probably have to deal with an influx of new bonds.

Dominating yesterday's new-issue slate, Goldman, Sachs & Co. tentatively priced, repriced and restructured $628 million South Carolina Public Service Authority revenue refunding,bonds.

At the repricing, the amount was decreased from $643 million. Maturities were added in 2010, 2011, 20-14, 2018, 2021, and 2025. Yields were raised by about two basis sis points in 2032.

Serial bonds were priced to yield from 3.40% in 1995 to 5.20% in 2011. A 2014 term was priced as 5s to yield 5.25%; a 2018 term was priced as 5s to yield 5.30%; a 2021 term was priced as 5 1/8s to yield 5.40%; a 2025 term was priced as 5s to yield 5.32%; and a $195 million 2032 term was priced as 5 1/8s to yield 5.45%.

The managers said they expected the bonds to be rated A1 by Moody's Investors Service and A-plus by Standard & Poor's Corp., except for the insured bonds, which are rated triple-A. Bonds from 2003 through 2011 are insured by AMBAC Indemnity Corp., while the 2025 term is insured by the Financial Guaranty Insurance Co.

Goldman also priced and repriced $70 million Maine Health and Higher Educational Facilities Authority revenue refunding bonds for the Maine Medical Center.

Yields were lowered by five basis points from 1994 through 1996 and in 1998 and 1999.

The final scale included serial bonds priced to yield from 2.65% in 1994 to 5.10% in 2008. A 2013 term was priced as 5s to yield 5.30%.

The bonds are insured by Financial Security Assurance Corp. and rated triple-A by Moody's and Standard & Poor's.

In competitive new issue action, Goldman won $168 million Nevada GO refunding bonds with a true interest cost of 4.6887%.

The firm reported an unsold balance of $23 million late in the day.

Serial bonds were reoffered to investors at yields ranging from 3.10% in 1995 to 5% in 2012. Bonds from 2001 through 2006 were not formally reoffered.

The Nevada bonds are rated double-A by Moody's and Standard & Poor's.

New York City officials are preparing to sell bonds sometime this month to take advantage of recent state legislation allowing the city to extend the maturities on bonds financing certain projects, a city finance official said.

New York City Sets Sale

In addition, the city will issue tax anticipation notes at the end of the month, the official said. The city has yet to determine the size of either deal.

The legislation, which allowed the city to extend the so-called period of probable usefulness of certain bond deals, was passed by the state lawmakers during the past legislative session.

Michael Geffrard, director of the city's Office of Public Finance, said the legislation will allow the city to refinance bonds maturing in five years with bonds maturing in 10 years and 15 years. The city, he said, would save more than $500 million through the issue, which could amount to as much as $500 million.

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