Municipal bond and note prices rallied yesterday after gross national product data showed lower than expected inflation statistics.

Real gross national product advanced near expectations at an annual rate of 2.4% in the third quarter. But both the implicit and fixed-weight inflation measures were lower than expected. The implicit deflator rose 1.8%, down from the 4.5% gain in second quarter, and the fixed weight deflator was up only 1.8%, after a 3.1% gain during the second quarter. Prices gained more momentum when the Conference Board reported consumer confidence had plunged to recessionary levels in October.

Tax-exempts significantly lagged the 30-year Treasury bond's 1 1/2 point gains after the report convinced the markets that the economiy is sluggish enough that a Fed ease is imminent.

Secondary prices were quoted up 3/8 point on average and as much as 5/8 point on some dollar bonds. In the debt futures market, the December municipal contract settled up 22/32 to 94.28. Reflecting municipals' slower pace, the December MOB spread widened to negative 158 from negative 135 Monday.

The market still faces Friday's employment report and supply continues to hit the primary sector at a healthy pace, but most traders were optimistic about the market's near term prospects.

"The market seems like it's back on the uptick and you're supposed to be long," said a New York based trader. Other market participants note that retail investors are approaching the market with caution after the recent price drops.

"When the market tanked last week people got cautious," a Chicago-based trader acknowledged. "A lot of stuff was out for the bid today and people were passing things up. Salesmen don't want to get caught again."

Traders also said that low yields were giving investors "sticker shock."

"Forget the economy and a Fed ease and the important thing is that the retail demand for munis is significantly lower than three weeks ago because of these low yields," a trader said.

But the market's improvement yesterday proved to be good news for new issues, which found renewed investor interest.

An issue of $193.54 million Nevada various limited tax bonds was won by a First Boston group with a true interest cost of 6.3621%.

The issue included serial bonds priced to yield from 5.10% in 1994 to 6.60% in 2011.

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

First Boston reported an unsold balance of $24 million late in the session.

Goldman, Sachs & Co. as senior manager won $130 million East Bay Municipal District Alameda and Contra Cost Counties, Calif., subordinated water system revenue bonds with a true interest cost of 6.583%.

The bonds were priced to yield from 5.25% in 1995 to 6.45% in 2008. A 2012 term is priced as 6 3/8s to yield and a 2021 term is priced as 6 3/8s to yield.

The bonds are AMBAC-insured and triple-A rated by both Moody's and Standard & Poor's.

Goldman also won a $50 million portion of East Bay MUD wastewater system subordinated revenue bonds with a TIC of 6.588%.

The issue was priced to yield from 4.55% in 1992 to 6.45% in 2008.

A 2012 term is priced as 6 3/8s to yield 6.50% in 2012; a 2021 term is priced as 6 3/8s to yield 6.567%.

The issue is also AMBAC-insured and triple-A by Moody's and Standard & Poor's.

Goldman reported a combined unsold balance of $26.8 million near the close.

In negotiated action, Merrill Lynch as senior manager received the verbal award on $125 million Alliance Airport Authority special facilities revenue bonds for the American Airlines Inc. project.

The managers own the bonds, which are noncallable and priced as 7s to yield 7.335% in 2011.

The issues is rated A3 by Moody's and BBB-plus by Standard & Poor's.

In other action, Smith Barney, Harris Upham & Co. priced $83 million Mesa, Ariz., GO refunding bonds.

The offering included serial maturities priced to yield from 4.70% in 1993 to 6.15% in 2002.

The issue is insured by AMBAC and triple-A rated by both Moody's and Standard & Poor's.

In follow-through business, Goldman, Sachs & Co., senior manager for $158 million Missouri GO building and water pollution control refunding bonds, reported an unsold balance of $34 million, down from $43 million Monday.

In secondary trading, prices were up anywhere from 1/8 to 5/8 point.

Traders reported several bid-wanted lists, which they said appeared to bank liquidations. Trading was moderate, but market sources noted that there was $15 milion New York Local Government Assistance Corp. 6 1/2s of 2015 offered at a 6.87% and were rumored to have traded and reoffered through 6.90%. A $4 million block of West Virginia Building Authority insured 6 3/4s of 2017 were rumored to have traded around 6.80%.

In dollar bond trading, North Carolina Eastern 6 1/2s of 2017 were quoted at 96 5/8-3/4 to yield 6.76%. Denver Airport 7 3/4s, due 2021, were quoted at 94-lock to yield approximately 8.29%. New York City Water Authority 7s of 2015 were quoted at 99 1/8-3/4 to yield 7.02%, while Washington Public Power Supply System 6 7/8s of 2017 were quoted at 99 3/8-1/2 to yield 6.92%. Massachusetts Water Resources Authority 6 1/2s of 2019 were quoted at 94 3/8-1/2 to yield 6.94%.

Meanwhile, short-term note yields fell about 10 basis points on average.

In late secondary trading, Los Angeles Trans were quoted at 4.15% bid, 4.10% offered. Texas Trans were quoted at 4.15% bid, 4.10% offered and Pennsylvania Tans were quoted at 4.30% bid, 4.25% offered. March New York State Trans were quoted at 5.05% bid, 5.00% offered, while New York City Rans were quoted at 5.00% bid, 4.95% offered.

Ratings News

Both Moody's and Standard & Poor's assigned gilt-edge triple-A ratings to today's competitive sale of $441 million California GOs.

The move eased some market concern about the state's credit standing in the face of a $3 billion budget gap.

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