The tax-exempt market made late gains of 1/4 point yesterday, and traders reported a solid underlying tone that they hope will translate into a turn-of-the year spike.

For the last two months, prices have sagged as the Street slogged through heavy issuance. Market players consoled themselves with hopes of interest from investors laden with cash from coupon reinvestment in January.

Calendars have already begun to shrink ahead of the new year, traditionally a time of light issuance. The Bond Buyer's 30-day visible supply dipped to $2.4 billion yesterday, while Standard & Poor's The Blue List of dealer inventory fell $134 million, to $1.4 billion.

Many market players who just a short time ago had to reprice their inventories to meet a deluge of cheap deals yesterday reported brisk business and expet investors to snatch up dwindling new sues at stiffer prices.

"It's thinning out, and some names have about 10 basis points to go before the holiday break," one trader said. "A lot of bonds will leave the Street this week, and retail will have lots of money for the new calendar year."

But other market players noted that prices have already made solid gains against supply and that the market may be seeing the last of cash-laden investors for a while.

"Sometimes the January business gets done in Decmeber," said one trader. "Then what you get is a lot of disappointed people."

Underwriters reported good investor demand yesterday, although new-issue activity was confined to the short-term bond sector.

First Boston Corp. as senior manager tentatively priced and repriced $100 million of Houston water and sewer system junior lien revenue refunding bonds to lower yields five to 15 basis points.

A First Boston officer reported the loan sold on a priority basis in the primary sector to the gambit of investors.

The final pricing included serial yields scaled from 4.70% in 1992 to 5.55% in 1995.

The bonds are rated Baal by Moody's and A-minus by Standard & Poor's and Fitch Investors Service.

Secondary activity was also light, and traders reported few bid-wanted lists. Prices were up 1/4 point.

In the debt futures market, the March municipal contract settled up 1/32 to 94.27. The March MOB spread was calculated at negative 187.

One of the larger trades of the day was a block of Florida Board of Education 6s of 2025 in the $20 million range, which was rumored to have traded around 6.61%.

The markets paid little attention when industrial production plunged 0.4% in November after three months of little overall change, while total industrial capacity utilization tumbled 0.5-point to 79.1%.

In secondary dollar bond trading, Denver Airport 7 3/4s of 2021 were quoted at 97-1/2 to yield 7.97%, Port Authority of New York and New Jersey 6 1/2s of 2021 were quoted at 96 3/8 - 5/8 to yield approximately 6.75%, and New Jersey Turnpike Authority 6 1/2s of 2016 were quoted at 98 7/8 - 99 1/8 to yield 6.57%. Pennsylvania Turnpike 6 1/2s of 2013 were quoted at 98 3/8-lock to yield 6.64%.

Prices of short-term municipal securities fared roughly 10 basis points better yesterday than Friday overall, as low supply continued to encounter heavy demand.

Top-rated Los Angeles Trans traded at 3.48%-3.44%, firmer than the 3.57%- 3.50% that changed hands Friday. Texas Trans also did better, offered at 3.40% compared with 3.50% Friday.

New York State Trans changed hands yesterday at 4.70%-4.63%, significantly better than the 4.95%-4.80% bid-offered spread reported Friday, and New York City Rans were selling at 5.10%-5.00%, the same as Friday.

Although tax-exempt yields are already at historical lows, for investors in the top 31% federal tax bracket, municipals have to yield only 69% of comparable Treasuries to offer equivalent after-tax returns, according to a recent Roosevelt & Cross report.

Citing Delphis Hanover data, triple-A municipals currently yield more than 80% of comparable Treasuries, thanks mostly to a deluge of yearened supply.

Within the last week, levels have been at their 52-week highs compared with the Treasury market. Short-term municipals offer even more yield. On an after-tax basis, the report says a three-year Treasury note would have to yield 6.59% to equal three-year tax-exempt bonds yielding 4.55%, a gain of about 110 to 120 basis points after taxes.

MTA Returns to Primary

The New York Metropolitan Transportation Authority will tap the market today with a $192 million offering of transit and commuter facilities revenue bonds, to be priced in the negotiated sector by a group led by Bear, Stearns & Co.

The sale will be the first since New York State's budget woes derailed $420 million of MTA bonds, backed by state appropriation, in November.

Investors backed away from the previous deal after New York State announced much greater budget woes than originally reported. The MTA's sale was delayed and repriced in the secondary to lower yields as much as 15 basis points.

The incident caused trepidation among market players and cast a shadow over New York deals backed by state appropriation. However, the concerns were relatively short-lived as several New York deals passed muster last week at higher yields.

But traders said yesterday they expected the deal would find plenty of investor interest at yields in the 7.25% to 7.30% range for long bonds.

"There's a lot of cash around, and there will be plenty of demand for this deal," said one market source. "People need some new names."

Insured Volume Up

Insured volume continued to increase in 1991, representing 30% of the market, and has already reached the second-highest level ever.

Municipal issues backed by bond insurance totaled $44.2 billion through November and will total $44.8 billion by yearend, according to the Public Securities Association. That would be second only to 1985's $51.2 billion.

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