Prices were mixed with a firm tone yesterday, but market players were cautious ahead of Friday's producer price report.

Municipals opened higher in spots, thanks to modest gains in the Treasury market. Government prices opened higher because of lower gold prices and the expectation of lower oil prices due to possible production increases by the Organization Petroleum Exporting Countries.

Secondary traders reported an active morning session, centered around several sizable bid-wanted lists.

Market players were cautious overall, but the tone remained firm throughout the session. Many pre-refunded bonds were said to be sold to permanent investors, although action tapered off by midsession.

By session's end, prices were quoted unchanged, but some bonds made gains of 1/8 to 1/4 point.

In the debt futures market, the September municipal contract settled Up 6/32, to 100.05. The September MOB spread widened to negative 337 from negative 329 Friday as the government contract surged ahead of municipals.

Despite the lack of new deals, market players did see plenty of follow-through business as last week's new issues hit the secondary market.

For example, Goldman, Sachs & Co. freed $744 million New York State Dormitory Authority City University consolidated and second general resolution revenue and refunding bonds to trade.

The offering was last week's largest deal and bonds traded yesterday. The Series B 5 3/4s of 2013 were quoted late in the day at 6.04% bid, 6.03% offered. They were originally priced to yield 6.05%.

The First Boston Corp. freed $713 million Puerto Rico Public Buildings Authority revenue refunding bonds from syndicate restrictions.

The bonds were quoted late in the session at 5.85% bid, less 3/8, but broke down 1/2, but posted a marginal improvement by session's end. The bonds were originally priced to yield 5.85%.

Goldman, Sachs & Co. freed $346 million District of Columbia general obligation refunding bonds from syndicate restrictions.

Traders said there was no active trading.

Merrill Lynch & Co. freed $256 million Seattle, Wash., water system and refunding revenue bonds to trade.

The 5 1/4s of 2023 were quoted at 5.83% bid, 5.81% offered, where they were originally offered to Investors at 5.82%.

Smith Barney, Harris Upham & Co. freed $137 million Allegheny County, Pa., airport revenue bonds for the Pittsburgh International Airport from syndicate restrictions.

The Financial Security Assurance 5 5/8s of 2016 were quoted at 95 1/2-96 to yield 5.98% in active trading. The bonds were originally priced at 5.97%.

Looking ahead, market players said tax-exempts are likely to be range bound until Friday's producer price report, followed by next Tuesday's consumer price index report.

A jump in inflation could prompt the Federal Reserve Board to tighten monetary policy, the possibility of which has dogged the credit markets over the last week.

Also prompting caution was the imminent outcome of the national budget process, which hangs over the market's head.

Long-term interest rates will climb by as much as 100 basis points if Congress falls to enact President Clinton's deficit reduction plan, according to a Treasury study released over the weekend.

But a chorus of voices from the Street urged investors to play their hands now, although with prudence.

"If we can get through the release of PPI and CPI, we'll have a very nice rally in the markets." said James L. Kochan, head of fixed-income research at Robert W. Baird & Co. "The current concerns will be left behind, and we should see the Treasury long bond down to 6 3/4% and lower.

"Those of us waiting for further weakness before buying will be frustrated," Kochan said.

Market players expected demand to increase because of upcoming bond calls and redemptions.

Some observers say July 1 may be the largest municipal bond redemption date yet.

Estimates of the total amount municipals to be retired, either by car or maturity, range up to $15 billion, according to a recent market newsletter by Gabriele, Hueglin & Cashman.

The prospect of higher taxes, which boosted municipal prices after the presidential election, surfaced again late last week.

The firm also notes that, "Adding to extant demand for municipals will be higher income tax rates for upper middle and upper income taxpayers."

In a top bracket of 31% a 5.75% tax-free return is comparable to a 8.33% in taxable yield; in a top bracket of 39.6%, it's comparable to 9.52% - 119 basis points higher.

The prospect of higher taxes, which boosted municipal prices after the presidential election, surfaced again late last week as it became more likely President Clinton's budget plan would make it through Congress.

In keeping with the anticipated higher taxes, market players have recently reported a stronger demand for bonds from retail. The demand, they add, has held the tax-exempt market steady against big price drops in the Treasury market.

Kemper Securities Inc. yesterday reported that, since mid-April, Treasuries have traded in a 30-basis point range, while municipal yields have moved in a tighter range, fluctuating only 10 basis points.

But, despite the allure of municipals compared with other securities, firms urge their customers to use caution by buying bonds in the eight to 10-year range.

On the supply side, issuance has been heavy all year, but dealers anticipate the typical summer ebb. If rates creep much higher, they add, many refundings could be postponed. eliminating more supply.

Now Deals

Topping light action was $94 million Atlanta, Ga., unlimited tax general obligation school improvement bonds, won by a Kidder, Peabody Inc. group with a net interest cost of 5.5712%.

The firm reported an unsold balance of approximately $24.5 million late in the day.

Serial bonds were roeffered to investors at yields ranging from 2.60% in 1994 to 5.65% in 2015. A 2018 term, containing $24 million of the loan, was priced as 5.60s to yield 5.68%.

The issue was rated double-A by Moody's Investors Service and Standard & Poor's Corp.

Secondary Markets

Traders reported that several bid-wanted lists circulating early in the session totaling just under $200 million.

The lists included some sizable blocks of bonds in the $8 million to $10 million range, including $12 million Washington, D.C., FSA 5 1/2s of 2006.

But after several weeks of growing supply, The Blue List of dealer inventory has begun to fall. Yesterday it declined $60 million, to $1.44 billion.

In secondary dollar bond trading, prices were quoted narrowly mixed on the day.

In late action, Farmington, N.M" MBIA 5 7/8s of 2023 were quoted at 99 7/8-100 to Yield 5.88%; California Water 5 1/2s of 2023 were quoted at 5.81% bid, 5.77% offered; and Texas Municipal Power MBIA 5 1/4s of 2012 were quoted at 5.75% bid, 5.70%.

In short-term note trading, yields were mixed on the day, after prices posted gains last week, thanks to an infusion of redemption cash, traders said.

In late action yesterday, California Trans were quoted at 2.75% bid, 2.50% offered; Los Angeles Trans were quoted at 2.75% bid, 2.65% offered; New York State Trans were quoted at 2.25% bid, 2.15% offered; and Texas Trans were quoted at 2.25% bid, 2.15% offered.

Washtubs Outlook

Standard & Poor's yesterday revised its ratings outlook on various outstanding Washington Suburban Sanitary District, Md., bonds to negative from stable.

However, Standard & Poor's affirmed its AA rating of the debt.

The move applies to $433.4 million outstanding water supply bonds, $390.4 million outstanding sewage disposal bonds, $40 million administration building construction bonds, and $828.5 million general construction bonds.

Standard & Poor's said the affirmed rating reflects the service area's diversified economic base, high income levels. strong management, and an ambitious capital plan. The outlook was revised to reflect increased fiscal pressure, diminished operating reserves, and relatively high user rates, the rating agency said. Additionally, the districts $1.1 billion capital plan continues measures, Standard & Poor's said.

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