Municipal prices retreated slightly in the face of advancing supply yesterday, dominated by $600 million of Houston revenue bonds, the largest deal of the week.

Friday's October employment data had convinced the market that the Fed would cut the discount rate to 4 1/2% from the current 5% rate and possibly let the fed funds rate fall an additional 25 basis points to 4 3/4%. But the move failed to materialize, pushing prices 1/8 to 1/4 point lower in the morning, where they remained for the rest of the session.

In the debt futures market, the December municipal contract settled down 3/32 to 94.26, with the December MOB spread calculated at negative 145.

Despite the small price drop, trading was light and the market was unconcerned about the lack of Fed action. New issuance instead took center stage as the supply calendar increased.

The Bond Buyer's 30-day visible supply rose to $5.3 billion yesterday, up from $4.8 billion Friday.

In addition, market players will eye the Treasury's sale of $38 billion over the next three days at the quarterly refunding auctions.

"The deals will have to be priced to sell," one trader said. "It might put a little pressure on the secondary, but there are a lot of buyers down 1/4 point or so."

New-issue action was light yesterday, but First Boston as senior manager tentatively priced the $600 million Houston Water and Sewer System bonds.

A First Boston officer said the deal started off slowly, but picked up momentum near the end of the order period. The offering was not repriced late yesterday, but the officer said there might be minor changes made today.

The officer added that insurance companies took bonds in the mid-range along with bond funds. Trust departments were active in the serial maturities, the officer said, especially in the series B bonds.

The tentative pricing included $70 million of new-money junior lien revenue serial bonds priced at par to yield from 4.70% in 1992 to 6.10% in 2001. A 2008 term is priced as 6 3/8s to yield 6.60%, and a 2021 term is priced as 6 1/2s to yield 6.734%.

There are $157 million of prior lien revenue refunding serial bonds priced at par to yield from 4.70% in 1992 to 6.30% in 2003. A 2008 term is priced as 6 3/4s to yield 6.80%, and a 2010 term is priced as 6 3/8s to yield 6.75%.

There is also a $396 million junior lien revenue refunding serial portion priced at par to yield from 5.50% in 1996 to 5.90% in 1999. A 2015 term is priced as 6 1/2s to yield 6.70%, and a 2017 term is priced as 6 1/4s to yield 6.657%.

Finally, there are zero coupon bonds priced to yield from 6.30% in 2000 to 6.90% in 2012.

The junior lien revenue bonds are insured by AMBAC Indemnity Corp., while the prior lien revenue refunding bonds are insured by Financial Guaranty Insurance Co. The issue is rated triple-A by both Moody's Investors Service and Standard & Poor's Corp.

In other action, Merrill Lynch& Co. as senior manager priced $77.7 million of California Public Works Board lease revenue bonds for the Department of Corrections.

The offering included capital appreciation bonds priced to yield from 5.45% in 1996 to 6.50% in 2009.

The order period will run through Monday, Nov. 11.

The managers said they expect double-A ratings from both Moody's and Standard & Poor's.

Traders said secondary activity was minimal yesterday, and Standard & Poor's Corp.'s The Blue List of dealer inventory totaled $1.37 billion.

Dollar bond prices were quoted down 1/8 to 1/4 point, except for Denver Airport bonds, which slipped around 1/2 point. Market sources said there was $10 million of Denver Air 7s out for the bid.

North Carolina Eastern 6 1/2s of 2017 were quoted at 96 1/2-3/4 to yield 6.77%. Denver Airport 7 3/4s, due 2021, were quoted at 92 1/2-93 1/4 to yield approximately 8.36%. New York City Water Authority 7s of 2015 were quoted at 99 1/8-3/8 to yield 7.04%, while Washington Public Power Supply System 6 7/8s of 2017 were quoted at 99 1/4-3/8 to yield 6.92%. Massachusetts Water Resources Authority 6 1/2s of 2019 were quoted at 94 3/4-95 to yield 6.92%.

Short-term note yields were mostly unchanged in light trading.

"Everybody was looking for funds to come in with coupon reinvestment cash, but it didn't happen," said one trader. "The word was they wanted floaters [variable-rate notes] instead."

In late secondary trading, Los Angeles Trans were quoted at 4.02% bid, 3.97% offered. Pennsylvania Tans were quoted at 4.16% bid, 4.10% offered. March New York State Trans were quoted at 4.93% bid, 4.85% offered.

Negotiated Pricings

Bear, Stearns & Co. priced $45 million of Oregon Housing and Community Services Department mortgage revenue bonds, single-family mortgage program.

The offering included series D bonds priced at par to yield from 4.75% in 1993 to 6.40% in 2005. A 2013 terms is priced to yield 6.70%, and a 2027 term is priced to yield 6.80%.

Series E serial bonds were priced identically to the series D bonds, but a series E 2016 term was priced to yield 6.75%.

There also were series F bonds, subject to the federal alternative minimum tax, and priced to yield 7% in 2022.

The issue is rated Aa by Moody's.

Upcoming Issues

To provide New York State with some budget relief this fiscal year, the Metropolitan Transportation Authority is planning to refund $422 million of its outstanding debt this week, an authority official said yesterday.

The refunding should provide "dramatic present value savings," said Edward Armendariz, the authority's finance director. The state, which appropriates the revenues for the bonds annually, could see "better than $10 million" of budget relief for its fiscal 1992 budget, which began April 1, he noted.

Goldman, Sachs & Co. is senior manager and bookrunner for the offering, which will refund certain maturities in the Series 1, 2, and 4 bonds sold under the 1987 service contract authorization, said Mr. Armendariz. He added the authority is eyeing Nov. 7 as the sale date.

The authority is also planning to sell about $200 million of new bonds in about 30 days. The bonds would mark the final installment on the authority's service contract bonding authorization.

Bear Stearns & Co. is senior manager and bookrunner of the negotiated offering.

About $100 million of the bond proceeds will go the Transit Authority's capital program and $53 million will be earmarked for the commuter railroad's capital program, Mr. Armendariz said. The remaining proceeds will be used for a variety of purposes, including financing capitalized interest payments and funding debt service reserve funds, he added.

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