Interest rates on tax-exempt bonds are at their lowest levels in four years and are expected to trend lower, but not right away, traders say.

Traders said Friday that they expected municipals to trade in a very tight range until the August employment report is released on Sept. 6. Some are betting that a weak jobs number will prompt the Federal Reserve to reduce interest rates another notch.

Yields on tax-exempt bonds have been inching lower for nine consecutive weeks -- falling more than 30 basis points over that time frame -- despite heavy new-issue supply. It is ironic now that supply has lightened this week that traders are wary of a slight backup.

As David Madigan, vice president and manager of municipal strategy at Merrill Lynch & Co., pointed out in the latest edition of the firm's Fixed Income Weekly: "The secondary market, in fact, seems posed for a gain, but the dearth of supply to meet orders has kept things quiet. As has happened many times in the municipal market, the market will rally on supply as more transactions can be used to update yields. For now, the light trading activity is making it very difficult to pinpoint real trading levels."

Traders are looking to the government bond market to call the shots for the weeks ahead of the employment numbers and investors are expected to be reluctant buyers should the yield approach 8% on the 30-year bond without a further easing move by the Fed. Municipal market participants are not anticipating any significant selloff, but noted Friday that a serious upside move could not be sustained without the lead of the government market.

Philip Braverman, chief economist and senior vice president at DKB Securities Corp., said Friday that the govenrment bond market is "nervous, having come a log way so quickly." But it has absorbed "waves of profit taking, and despite the profit taking and some signs of a better economy, rates are holding in."

The recent strength evidenced in some of the recent economic indicators is "transitory," Mr. Braverman argued. He referred to the latest retail sales figure as 'bizarre." The 2.7% rise reported for department store sales was "actually a decline on an unadjusted basis," he noted.

Upcoming economic data could "reinforce market recognition of the economy's continuing sluggishness," Mr. Braverman suggested. The next 10-day car sales report should continue at the weak 6.2 million rate for the first 10 days of August. And the Conference Board Consumer Confidence report due Aug. 27 should mirror the decline in the Michigan Consumer Confidence Survey.

Mr. Braverman is expecting the Federal Reserve to ease again after a weak jobs report. The discount rate will be cut to 5% and the funds rate to 5 1/4%, he predicted. The yield on the 30-year government bond should go below 8% next month, if the Fed cuts the rates following a weak employment number and will approach 7% within the next 12 months, he concluded.

On Friday, tax-exempt bond prices closed essentially unchanged in very quiet, dealer trading. Traders paid little or no attention to the stronger-than-expected 0.5% jump in July industrial production. Treasury bond prices slipped moderately on the news, but they were backed to even on the day before the close of trading.

In the dollar bond market, New Jersey Turnpike Authority 7.20s, due 2018, were quoted in late trading at 103 1/4-1/2 to yield 6.59% to the par call in 1999 and 6.60% to the 1993 premium call. Florida State Board of Education 7 1/4s of 2023 were at 103 1/2-1/2 to yield 6.83% to their par call in 2004 and the recent 6 3/4s of 2021 were locked at 98 5/8, where they returned 6.86% to maturity.

In the New York market, the latest Triborough Bridge and Tunnel Authority insured 6s of 2019 settled at 90 1/4-3/8 to yield 6.77% and a more vintage issue of New York LGAC 7s of 2016 closed at 98 3/8-5/8 to yield 7.12%.

In other dollar bond activity, Colorado River Authority insured 6 5/8s of 2021 were at 97-97 1/8 to yield 6.85% and Puerto Rico Electric Power Authority 7s of 2021 closed at 98 3/4-99 to yield 7.08%.

Note trading was quiet throughout the session with yields virtually unchanged on the day. California notes were quoted at 4.63% bid, 4.60% offered; New York City tax anticipation notes also at 4.63%, 4.60%; New Jersey notes at 4.64%, 4.60%; and New York tax and revenue anticipation notes at 5.08%, 5.06%.

In the prerefunded bond market, issues with a 1995 call date were at 5.52% bid, 5.48% offered.

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