Municipals outperformed most of the government market Friday for the second straight session as players bid up for secondary bonds.

Treasury bonds headed mostly lower after a stronger than expected employment report. But municipals began to improve, thanks to better bids for secondary product.

Government traders took a step back when the Labor Department reported that widespread employment gains among non-farm businesses produced a 208,000 surge in jobs in November, with the civilian unemployment rate dropping to 6.4% from 6.8%.

The unemployment rate was the lowest in nearly three years. Government market losses were tempered because, at the same time, October's previously reported jobs increase of 177,000 was revised down to 147,000.

Municipals paid little heed to the government market as players were said to buy bonds in sizable amounts at higher prices. By session's end, bonds were quoted up 1/4 point on average.

In late secondary dollar bond traing, Los Angeles Wastewater FGIC 5.20s of 2021 were quoted at 5.57% bid, none; New York Power Authority 5 1/4s of 2018 were quoted 96 7/8-97 1/4 to yield 5.48%; and Chicago GO FGIC 5 1/2s 2024 were at 5.67% bid, none.

Orange and Orlando GFIC 5 1/8s of 2020 were quoted at 5.51%, 5.47% offered; New York City 5 3/4s of 2014 were quoted 6.01% bid, 5.95% offered; Chicago O'Hare MBIA 5s of 2018 were 5.59% bid, 5.57% offered.

In debt futures, the March municipal contract settled up 16/32 to 101.28. The contract was urged on by a late thrust by the 30-year Treasury bond, which was nearly 1/2 point higher to yield 6.24% near the end of New York trading. Government traders said the long bond rallied at the CBT close, boosted by the unwinding of curve trades and short covering as traders looked ahead and saw nothing but friendly inflation reports this week.

The MOB spread, meanwhile, narrowed to negative 418 Friday from negative 425, reflecting a superior performance by municipals compared to the Treasury market.

Tax-exempt players first noted the improved demand for municipals on Thursday. They cited the market's relative cheapness to other securities and buying ahead of the various annual payments that are due after Jan. 1. Some players also speculated that buyers had begun to tap the municipal market in a long-term bet that tax-exempt value would hold up the best in an environment of rising interest rates.

The Blue List rose about $28 million on Friday to $1.48 billion, ending a string of six consecutive declines, but dealers reported improved selling to permanent investors.

Looking ahead, dealers will match closedly the results of consumer and producer price reports this week, but new deals will also be a strong determinant of market price movements, they said. Considering the stronger bid for bonds seen late last week, players predicted good results for upcoming new deals.

The Bond Buyer Friday tabulated the week's total bond and note sales at around $4 billion.

The negotiated slated features $665 million New York, N.Y., general obligation bonds, to be priced by Paine-Webber Inc.; $330 million New York Local Government Assistance Corp., GOs, to be priced by Bear, Stearns & Co.; and $180 million Arizona Transportation Board subordinated transportation excise tax revenue bonds, to be priced by Smith Barney Shearson.

The competitive calendar is dominated by $333 million Maryland Department of Transportation revenue refunding bonds, scheduled for sale Wednesday, $299 million King County, Wash., refunding bonds, to be sold today; and $180 million New York State Dormitory Authority revenue bonds, to be sold tomorrow.

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