Municipal bonds finally rallied yesterday following two reports suggesting a slackening economic pace and reduced likelihood of an immediate credit tightening by the Federal Reserve.

"It's a grab-a-thon," one trader said of yesterday's active session. "Everybody wants bonds."

Tax-exempts climbed 5/8 to 3/4 points overall, while the Treasury 30-year bond gained nearly 1 3/8 points to yield 7.53%.

"It's about time, huh," said another municipal bond trader. "It seems like we had to go through a week of bond-friendly economic data for the market to finally wake up and rally."

Yields on high-grade issues fell by seven basis points overall, while dollar bonds moved up 3/4 point, a municipal analyst said.

"It was active, and there was going away business, institutional [business]," he said.

In debt futures, the September contract settled up 1 3/8 points at 90 17/ 32s. Yesterday's September MOB spread was negative 389, compared to negative 378 on Wednesday.

While weaker-than-expected June retail sales and a larger than expected jump in weekly jobless claims boosted bond prices yesterday, the second trader also pointed to inflation reports earlier in the week.

Tuesday's producer price index report was more favorable to the market than expected, and Wednesday's consumer price index came in as expected.

Yesterday, retail sales climbed 0.6% in June, while May retail sales were revised to down 0.4% from. down 0.2%.

Initial claims for state unemployment insurance increased by 19,000 for the week ended July 9, a larger increase than analysts had expected.

The second trader said while municipals failed to achieve the altitude reached by government prices yesterday, tax-exempts, buoyed by favorable technicals, had not sold off as much as Treasuries in the recent past.

Municipals may have ended higher yesterday, but a combination of factors is working to keep them earthbound, he said.

One factor is that while demand for bonds exists, "the demand is very specific," the trader said.

He cited about $2 billion worth of street float that has been around for some time, most of it either discount bonds or bonds that are priced too high.

Most buyers these days are looking for current coupon bonds, which, considering the drop off in new issues, remain in short supply.

Participants are also unsure about the direction of interest rates.

"Conviction isn't there," the trader said, adding that the outlook could change if the U.S. invaded Haiti tomorrow.

In addition, institutional investors seem increasingly more comfortable with maintaining cash positions. In the past they may have been anxious about keeping too much cash on hand, but now they are much more patient when it comes to waiting for opportunities, he said.

The trader also cited "summer doldrums" the likes of which he said he hasn't seen since the late 1980s.

New York City next week will sell $750 million of refunding general obligation bonds through bookrunning senior manager Prudential Securities. Merrill Lynch & Co. will serve as co-senior manager.

An underwriting source said the fiscal 1995 Series A bonds could arrive next Tuesday, or more likely Wednesday.

A portfolio manager said price determines whether or not she's a buyer, particularly with a regular issue like New York City. If the bonds come cheap enough, she will take an interest in the deal, if not, she won't, she said.

In competitive action yesterday, Goldman, Sachs & Co. reported the account closed on the $234 million District of Columbia general obligation bonds it won with a true interest cost of 6.251%.

Elsewhere, Standard & Poor's Corp.'s Blue List of municipal bonds was down $40.1 million yesterday to $1.70 billion.

The 30-day visible supply of municipal bonds for today hit a 1994 high of $9.07 billion. That figure is up $1.59 billion from yesterday. The total comprises $5.67 billion of competitive bonds, up $91.9 million from yesterday, and $3.39 billion of negotiated bonds, up $1.50 billion.

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