Long-term tax-exempt prices were essentially unchanged yesterday in extremely light trading, but yesterday's coupon payment date helped firm up the note sector.

Traders pointed out that there are only $261 million of bonds up for public sale during this holiday-shortened week, and that dealers are unlikely to add significantly to their inventory going into Friday's June employment report.

On the other hand, note traders were expecting an infusion of funds today or tomorrow from July 1 coupon payments, and consequently note yields slipped a couple of basis points. Unlike the quiet bond calendar, note dealers are faced with a $1.2 billion New Jersey offering -- expected to be priced tomorrow -- and the possibility of a $3 billion California bridge loan.

The long end of the tax-exempt yield curve managed to hold its own yesterday, despite a stronger-than-expected 50.9% June reading from the National Association of Purchasing Managers. It was the first time this index came in above 50% since May 1990.

The modest price uptick in the municipal note sector took place at the same time that yields were moving higher in the short-term government market. Traders said that the cash expected to be available this week for investing in tax-exempts was the difference.

Municipal analysts continued to note the strong demand for the long end of the recent heavy supply of tax-exempt volume. More than $30 billion has reached the market in the last two months without significantly backing up dealer inventory. On May 1, municipal inventory in The Blue List stood at $1.2 billion. Yesterday, it was only $200 million higher, at $1.4 billion.

David Madigan, vice president and manager of municipal strategy at Merrill Lynch & Co., wrote in this week's edition of the firm's Fixed-Income Weekly that "long-terms are selling briskly, while serials are backed up in most deals." The pattern has caused the short end of the yield curve to "begin to flatten," while the long intermediates and long-terms continue "to sell on top of each other," Mr. Madigan noted.

Secondary market trading has begun to reflect the new-issue settlement schedule, Mr. Madigan continued. Bid lists have been getting longer and more date specific, he pointed out.

This type of selling activity has put a lot of shorter-call bonds in the market, Mr. Madigan explained. Bonds sold with 1997 calls or shorter have traded at implied volatilities of 8.5% to 9% versus current issues, while discounts and noncallable bonds reflect at 6% implied volatility, he said.

This difference presents a "unique opportunity" to trade out of current bonds into noncallable and short-call bonds at attractive spreads, Mr. Madigan argued. When the implied volatilities level off, the noncalls or short-calls will increase the value of the entire portfolio, he concluded.

Geroge D. Friedlander, managing director in portfolio strategy at Smith Barney, Harris Upham & Co., pointed out in the latest publication of the firm's Credit Market Comment that the heavy tax-exempt volume for the first half -- estimated at more than $71 billion -- has been achieved "without putting any upward pressure on tax-exempt interest rates."

Mr. Friedlander noted that the market's positive performance "extends beyond the high-grade sector, to insured bonds and medium-quality revenue bonds, and even medium-quality GOs." He estimated that the yield differential between long-term triple-A GOs and A-rated issues remains at a modest 20 basis points.

Medium-quality revenue bonds have been "one of the best performing sectors," Mr. Friedlander wrote. A-rated power revenue bonds are currently yielding roughly the same as long A-rated GOs, and essential service revenue bonds are yielding slightly less, he noted.

In secondary dollar bond trading, Florida State Board of Education 7 1/4s, due 2023, closed at 101 5/8-102 to yield 7.01% to the par call in 2004. New Jersey Turnpike Authority 7.20s of 2018 were quoted late in the day at 101 5/8-102, where they returned 6.85% to their 1999 par call.

New York LGAC 7s of 2016 were quoted in late trading at 95-95 1/4 to yield 7.42%; Metropolitan Seattle 6 7/2s of 2031 at 95 7/8-96 1/8 to yield 7.17%; and South Carolina Public Service Authority 7.10s of 2021 at 98 7/8-99 1/8 to yield 7.17%.

In the note market, New York State 5.40% tax and revenue anticipation notes were quoted late in the day at 5.18% bid, 5.17% offered and Los Angeles County 5% notes at 4.55% bid, 4.53% offered.

Prerefunded bonds were slightly weaker at the close. Issues with a 1995 call opened at 5.93% bid, 5.90% offered and closed around 5.95% bid, 5.92% offered.

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