Tax-exempt prices ended the week on a sour note Friday, buckling in sympathy with Treasuries, which plummeted on economic indicators that showed growing strength in the manufacturing sector.

The fixed-income markets got off to a bad start and never recovered after it was reported that industrial production rose 0.7% in August after increasing only 0.3% in July, and that capacity utilization was up 0.4% in August to 84.7%, the highest level since April 1989. An indication of burgeoning consumer confidence from a University of Michigan report and uncertainty about a U.S. invasion of Haiti also contributed to the downturn, sources said.

"As soon as the numbers came out, the market just went in the tank," one tax-exempt trader said. "Everyone's just kind of siring on:the bonds. Our head trader's got a gun to his head."

For the day, trader quoted dollar bond prices down 3/4 to a full point with high grades off 10 basis points in light to moderate activity. The December municipal futures contract closed clown 1 5/32 points at 89.05, off a high of 89.03 and a low of 87.23.

The decline in tax-exempt prices mirrored the downturn in government securities, where the benchmark 30-year Treasury bond ended down 118/32 points, to yield 7.76%, its highest yield of the year.

Christopher M. Dillon, vice president and municipal market strategist at J.P. Morgan Securities Inc., said the Treasury market's breakout from the 7.50% to 7.75% trading range on the long bond has some players eyeing an 8.00% yield as a very realistic possibility.

"People have now broadened their downside range," Dillon said. "On the muni side, we're kind of becoming exclusively reliant on cash-flow buying from funds, but they haven't seen good cash flow. There's no underlying strength of demand."

Some tax-exempt traders took solace that the municipal market did not underperform governments, but most acknowledge that a decidedly negative tone has descended on the market.

"Some traders feel there will be bounce, but even they have turned bearish for the long turn," said one market participant. "There is some concern in the market that when retail investors see what's happening there will be redemptions next week. If we see that, then the market will lose whatever liquidity it has left."

Despite the market's overwhelmingly negative response to the industrial production and capacity utilization data, some economists said the reaction was overdone.

"They were surprisingly strong, but if you look at the [industrial production and capacity utilization] numbers, a good part of the strength was in autos," said Anthony Chan, chief economist at Banc One Investment Advisors. "Everyone knows that auto sales were up about 11% in August so the surge in the auto component should not have been a big surprise. Nonetheless, the market chose to ignore that and concentrated on the headlines ."

Discounting the auto sector, production was up only 0.2%, Chan noted.

"The bottom line is that we're in a bear market and the market ignores the golden nuggets of good news and reacts only to bad news," he said.

But as far as the market is concerned, there's not much good news to be had.

"We've had two sobering pieces of information these last two Fridays. You just can't ignore numbers as bad as [the producer price index] and industrial production and capacity utilization," said James Kochan, head of fixed-income asset management at Robert W. Baird & Co. "Fundamentally, the economic news is not good and you're seeing substantial revisions taking place in a lot of market participants' interest rate forecasts."

Fears are heightening among some market participants that the yield on the 30-year Treasury bond could approach 9% in the next six to 12 months, unless the Federal Reserve is more aggressive in fighting inflation, Kochan said.

Another tightening is not widely expected following the Fed's next Open Market Committee meeting on Sept. 27, but Kochan believes there is a "better than even chance."

Another tightening "would help alleviate some concerns," he said, but acknowledged that the market is "going to remain weak and vulnerable for some time, until we see solid evidence that the economy is slowing."

Exacerbating the ugly mood on the street is the dearth of significant economic data until the first week of October, economists and market participants agreed. This week's new-issue calendar is also relatively light, offering little respite from Friday's dreary mood and leaving the market vulnerable to range trading.

"There's no calendar and that's leaving us nothing to rally out of," said one trader. "[This] week is going to be tough." The competitive calendar this week features $200 million of Connecticut general obligation bonds, $150 million of Nashville and Davidson counties, Tenn., government bonds, and $135 million of Illinois revenue bonds. On the negotiated front, CS First Boston is scheduled to price $250 million of Puerto Rico Municipal Finance Agency revenue bonds, and Bear, Steams & Co. is slated to bring to market $173 million of New York State Medical Care Facility Financing Agency facilities improvement revenue bonds.

The 30-day visible supply stood at $2.66 billion on Friday after falling $73.8 million on Thursday. Standard & Poor's Corp.'s "The Blue List" rose $101.4 million on

Friday to $1.87 billion.

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