Municipal prices ended last week on a firm note, but traders said Friday was one of the quietest trading days of the year.

As the summertime approaches, municipal participants said the tone of the market, the low rate of inflation, and the looming Clinton budget has increased the demand for bonds.

Traders said most of the activity on Friday took place before noon and even then there were few blocks of bonds traded in the secondary market and there were no large deals priced.

The bonds that did trade, though, were unchanged to 1/8 point higher.

The market moved higher through most of last week and a dearth of important economic indicators should help it remain firm.

Analysts and traders in the tax-exempt arena said on Friday that the underlying strength of the market is attributable to several factors.

Susan Peabody, senior vice president and manager of the municipal bond group at Alliance Capital Management Corp., said that investors are being drawn to municipal bonds for several reasons.

"With President Clinton's economic plan moving through the Senate, investors are going to look for more safe shelters from tax hikes," she said. "With taxes heading higher, yields from municipals are looking more attractive.'

Although Peabody said that the municipal market will be affected this week by the performance of the Treasury's auctions of two-year and five-year notes, the long-term picture is heavily dependent on inflation.

"The overriding concern for investors is the rate of inflation." Peabody said. "With that indicator remaining in check, we can safely move through supply."

Visible supply was up $736.4 million on Friday, to $6.10 billion. That level should not cause supply pressures and drive down prices, according to several municipal analysts.

This week, there are only a few large offerings on the calendar.

In the negotiated sector, issues of $747 million of Puerto Rico refunding general obligation bonds are scheduled to be sold by a Lehman Brothers group; an issue of $452 million of Seattle, Wash., municipal light and power revenue and refunding bonds are also scheduled to be sold by a Lehman Brothers group; and $142 million of St. Louis Municipal Finance Corp. leasehold revenue refunding bonds are scheduled to be sold by a team led by Prudential Securities Inc.

Both the competitive and the short-term sectors are expected to be quiet this week.

Peabody said that with the July 1 bond redemption date on the horizon and an expected flood of cash into the market, there should be no trouble with the current supply level.

"Last year, there was about $10 billion worth of bonds that hit their first call date and prices inched higher for most of the summer." she said. "This year, between the amount of bonds reaching their first call date, and coupon payments that come up, the figure could be between $18 billion and $20 billion."

Indeed, if interest rates alone are considered, issuers could realize a significant savings in calling bonds this July as they reach that first call date, according to analysts.

In 1983, the average of the Bond Buyer's 20-bond index was measured at 9.51%. Last week, the index was reported at 5.61%.

Some traders have said it has been increasingly difficult to get enough bonds to satisfy investor demand, and that some of the larger institutional buyers have been stockpiling paper for the past couple of weeks.

"The big guys have a lot of bonds that will slowly become available and quickly be more expensive within the next few weeks," said a New York-based trader. "It's supply and demand, and once this money comes into the market, demand will hit the roof."

Standard & Poor's Corp.'s The Blue List of dealer inventory, slipped $130.9 million, to $1.8 billion on Friday.

Friday's Action

Trading was light through most of the session on Friday.

The September MOB spread was calculated at a negative 349 from a negative 351 on Thursday. In futures, the September municipal contract settled up 2/32 to 101.03.

Quoted dollar bonds were unchanged to 1/8 point higher in some select spots on the day.

In late action, Orange and Orlando FGIC 5 1/2s of 2018 were quoted at 5.68% bid, 5.66% offered; Dade County School MBIA 5 1/4s of 2023 were quoted at 5.75% bid. 5.73% offered, and Boston, Mass., 5 3/4s of 2023 were quoted at 9 73/4-98 1/4 to yield 5.91%.

In the short-term note sector, yields were mostly unchanged on the day, traders said.

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