Municipals ended unchanged to slightly higher yesterday after a flurry of bid lists kept them from moving as high as governments on the August consumer price index report.

"More black and whites," one trader lamented. "There had to be at least eight or so sizable [bid lists] that I know of."

While he did see some arbitrage selling, most of it appeared to be from bond funds, the trader said.

While yesterday's CPI report came in a touch more favorably than expected, the trader said inflation remains a concern. "After the last couple of numbers, the [producer price index] and the CPI, the bearish sentiment has just overwhelmed the market," he said.

In light secondary activity, dollar bonds ended unchanged to up 1/8 point, while yields on high-grade issues finished unchanged, an analyst said.

In the government market, the 30-year Treasury bond ended up 3/8 point to yield 7.67%. In debt futures, the December municipal contract closed 1/4 point higher at 88 1/4. Yesterday's December MOB spread was negative 377, unchanged from Monday.

While bid lists were not overwhelming, "enough lists flowed into the market to keep it off balance," the analyst said.

The Labor Department yesterday reported a 0.3% increase in both the overall and core CPI rates for August. Economists had expected a bigger rise, 0.4%, in the overall rate.

"CPI was in line so that takes a little pressure off the Fed," said Reno J. Martini, chief investment officer of the Calvert Asset Management Company.

Martini, who not long ago thought the Fed would remain on hold for the remainder of 1994, now thinks it's possible that the Fed could act to tighten short-term rates as early as this month. Friday's bigger-than-expected jump in PPI, as well as other indicators such as the Journal of Commerce's Index, helped convince him of that, he said.

The Journal of Commerce's index has been rising all year, he said, and Federal Reserve chairman Alan Greenspan relies on it as a forward indicator, Martini said.

Martini also cited today's retail sales numbers, Friday's capacity utilization, and next week's housing starts figure as upcoming indicators to watch.

While Martini expects the 30-year Treasury bond to trade in a 7.50% to 7.75% range for a while, he still thinks the benchmark's yield could hit 8% some time before yearend.

"That's why I'm slightly negative on the market," Martini said. He believes it wouldn't take much to send the long bond to 8%, and another scare like Friday's PPI report could probably do it, he said.

Back in April and May, Martini decided he'd become a buyer if the benchmark's yield went to 7.75%.

"We did buy some bonds in June," he said. If yields hit that level again, Martini said he may try to swap out of some of the bonds he bought last year and into higher-yielding securities.

"Money has been pretty flat coming into the funds," said Martini, whose funds include the Calvert Tax-Free Reserves Limited Term portfolio, which was ranked number one among 29 national municipal bond funds for the year ended Aug. 31, 1994.

Richard Ciccarone, an executive vice president and director of tax-exempt fixed income research at Kemper Securities Inc., said while yesterday's CPI number came in slightly better than expected, bond market participants are taking cover.

"I think the municipal market as well as the bond market in general has taken to the trenches," Ciccarone said, adding that investors are positioning themselves defensively in the face of higher interest rates.

In the municipal market, that defensive strategy has created particular richness in the intermediate range as portfolio managers move to shorten duration. For instance, as of last Thursday, 10-year insured municipal bonds were trading at 47 basis points over comparable Treasuries, on an after-tax basis assuming a 31% tax bracket. On April 7, the spread between those two securities was 125 basis points, Ciccarone said.

Long-term municipals have also gotten rich, he said. For investors in the 31% tax bracket, 20-year insured municipals as of last Thursday were yielding 128 basis points over 30-year Treasuries. That yield has narrowed significantly since April 7, when 20-year insured municipals were yielding 227 basis points over comparable Treasuries for investors in the 31% bracket.

"They're both expensive, but it's become extra rich in the intermediate range," he said.

Municipals have become rich to Treasuries for an obvious reason, a big dropoff in supply, Ciccarone said, adding that new issues are down by roughly 42% from last year. Three things could happen to cause a significant increase in new issues, the analyst said. The first scenario would be a 2% drop in interest rates, while the second would be a change in the federal tax exemption code or additional federal aid, which would also trigger the need for local borrowing. Ciccarone said both those events are unlikely.

The third scenario would be sustained economic growth at a 4% annual rate, which would likely prompt some new-money deals. While the third scenario is more likely than the previous two, it's still unlikely to quench the supply shortage, Ciccarone said. So far, specialty states, among them New York, California, and Michigan, are feeling the paper pinch the most, he said.

Ciccarone said that next month will be a turning point when it comes to the direction of interest rates.

"I think October is going to be a key month for us," he said.

The analyst said that last year's tax increases targeted the wealthy, so their effect on consumer spending has been delayed. While tax increases on low and moderate income people show effects right away, wealthier families have reserves they can dip into so the effect is less immediate, he said.

Cuts in federal spending, as well as higher interest rates, are also likely to further weaken the economy, Ciccarone said.

In the new issue market, a Bear, Stearns & Co. group priced and repriced $144.7 million Austin, Tex., combined utility systems revenue refunding bonds.

The FGIC-insured offering consisted of $118 million serial bonds, offered at a top yield of 6.43% in 2024. At the repricing, the yield on the 2016 maturity was lowered by two basis points. The deal also contained $27 million of capital appreciation bonds, which offered a top yield of 6.60% in 2019. At the repricing, yields on all three maturities were lowered by five basis points.

In competitive action yesterday, a Merrill Lynch & Co. group won $130 million of Alaska Housing Finance Corp. collateralized revenue bonds with a true interest cost of 6.783%.

The offering consisted of serial bonds priced to yield from 5% in 1997 to 6.45% in 2012. The deal also contained 2015, 2019, 2025 and 2036 term bonds, with the 2036 maturity yielding 6.85%.

A Merrill Lynch source called yesterday's deal "very successful."

"The account was closed at the end of the order period," he said, adding that the "window of opportunity" that opened immediately following yesterday's CPI report attracted buyers looking for yield.

"The yield relative to the rest of the market is very attractive," the source said, adding that buyers saw a lot of promise in the credit.

The issuer has an "excellent" track record on loan origination, the source said, adding that 55% of the loans in yesterday's issue have already been originated. The triple-A rated bonds are also state general obligation bonds, which is not always the case with state housing issues, the source said.

While most of the longer paper went to bond funds, the offering also saw "a good amount" of retail demand from one to 15 years, he said.

The 30-day visible supply of municipal bonds yesterday totaled $3.10 billion, up $287 million from Monday.

That comprised $1.88 billion of competitive bonds, up $279 million from Monday, and $1.22 billion of negotiated bonds, up $8.2 million.

Standard & Poor's Blue List of municipal bonds was up $30.1 million yesterday to $1.68 billion.

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