Municipal losses lagged a 7/8 point drop in the Treasury market yesterday, which began sliding after the Fed failed to ease.

Market players had hoped the Fed would cut the discount rate.

But by late morning, it became apparent an ease was not forthcoming, and Treasury prices began to fall.

The government market came under further pressure after a dismal seven-year auction, and municipals added more losses in tandem.

MUnicipals did not suffer as severe a price correction as the Treasury market because they failed to move as high as governments in anticipation of a Fed ease.

By session's end, tax-free prices were quoted down slightly on the short-end, while the intermediate range dropped 1/4 point, and the long end fell as much as 3/4 point.

But traders noted that activity was light as players sought safety on the sidelines and the bid side was not rigorously tested.

"They hit govies pretty hard and more than a few people are worried," one trader said. "We're hoping that Treasuries stabilize or we've got a problem on our hands."

In the debt futures market, the December municipal futures contact settled down 16/32 to 95.17. The MOB spread narrowed to negative 269 from negative 284 Tuesday.

In relative light secondary dollar bond trading, prices were quoted unchanged to down as much as 3/4 point on the day.

Short-term note yields rose about five to 10 basis points on average, traders said.

New issuance was light yesterday, due to the holiday, but upcoming supply remains formidable.

The Bond Buyer calculated 30-day visible supply at $8.36 billion yesterday. The Blue List of dealer inventory rose $144.5 million to $1.22 billion.

Leading new-issue activity yesterday, Merrill Lynch & Co. as senior manager priced and repriced $70 million of North Carolina Medical Care Commission hospital revenue bonds for the Presbyterian Health Service Corp. project.

At the repricing, yields were lowered by five basis points from 1995 through 2002. The 2024 yield was raise by about two basis points.

The final reoffering included serial bonds priced to yield from 3.95% in 1995 to 6.10% in 2008. a 2014 term was priced as 6 1/8S, to yield 6.30%. A 2024 term, containing $37 million of the loan, was priced as 6S, to yield 6.377%.

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

Meanwhile, authorities at the Massachusetts Water Resources Authority said yesterday that continued negative arbitrage problems has temporarily delayed pricing a $450 million refunding issue. Some market players anticipated a pricing yesterday.

Paul DiNatale, spokesman for the authority, said its board of directors said the deal would be delayed until there are more favorable market conditions for the refunding.

Meanwhile, officials at the North Carolina Eastern Municipal Power Agency and Smith Barney, Harris Upham & Co. continue to eye the market anxiously, waiting for a propitious time to price the authority's $1.45 billion bond issue, according to market sources.

On Sept. 22, after initially pricing the deal, lead manager Smith Barney postponed it, citing unfavorable market conditions.

One underwriter close to the financing said yesterday that the authority was close to deciding to move forward with the bond issue last week, but held off, hoping that a weak unemployment report on Friday would encourage Federal Reserve Board easing and a clear improvement in the market tone.

Now that a disappointing jobs report has been released and a Fed ease is unlikely in the immediate future, the power agency has opted to stand part and is not likely to come to market in the near future.

"The levels that buyers are looking at are still too cheap for the power agency," he said. "The feeling is why bring a deal when there is a strong chance you are going to have to chase buyers all day long--and still might have to close the deal down again at the end of the day."

Officials at the power agency and Smith Barney did not return phone calls on the matter.

Finally, New York City sources say the city will sell about $200 million of long-term, variable-rate bonds during its next general obligation bond sales scheduled for the week of Oct. 19.

At the same time, the city will sell $800 million in GOs through a syndicate led by Lehman Brothers.

The city will sell the variable-rate bonds using the letter of credit capacity it gained after a November 1991 refunding completed by J.P. Morgan Securities Inc. An affiliate of Financial Guaranty Insurance Co. is expected to provide a liquidity facility for the variable-rate bonds.

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