Selling was heavy in the tax-exempt arena yesterday, but bulls prevailed as buyers snapped up available secondary product and grabbed new issues at aggressive levels.

The market slowed for the first time Wednesday after a month-long price surge, highlighted by a three-day rally sparked by last Thursday's weak jobs report and ensuing Fed ease.

The rally paused again early yesterday and traders reported a large amount of bid-wanted lists in the secondary as well as large bond blocks up for sale.

The halt in the upward surge made traders cautious early on and selling continued to be heavy throughout the session. But bid-wanteds and new issues were met by eager buyers, and by session's end, caution evaporated and reinvigorated traders took prices even higher.

Secondary dollar bonds gained 3/8 to 1/2 point overall, and more in spots, while high-grade yields fell about seven basis points. In the debt futures market, the September municipal futures contract settled up 2/32 to 97.15.

"There are plenty of sellers," one trader said. "But for every bid-wanted there are buyers. This market is still very strong."

Reflecting the continued strength, yields on The Bond Buyer's weekly general obligation bond indexes, calculated yesterday, plunged more than 20 basis points - the sixth consecutive week of declines.

The 20-bond index of GO bonds dropped 21 basis points to 6.17%, from 6.38% a week ago. It is at its lowest level since Aug. 16, 1979, when it was at 6.16%.

The 11-bound GO index fell 22 basis points to 6.07% from 6.29% last week. That index is at its lowest level since the 6.05% it reached on Aug. 30, 1979.

The last time the indexes dropped so precipitously was Jan. 21, 1988 when the 20-bond and 11-bond both fell 22 basis points and May 18, 1989 when the revenue index fell 26 basis points.

The 30-year revenue bond index reached an all-time low, falling 19 basis points, to 6.36% from 6.58%. That shatters the previous low of 6.53%, set Jan. 9 of this year. The revenue bond index began on Sept. 20, 1979.

New Deals

New issuance was relatively light yesterday, but investors wolfed down bonds at aggressive levels.

Leading action, J.P. Morgan Securities won $120 million of Tenessee GO bonds with a true interest cost of 5.522%, and reported the issue all sold by session's end.

The offering set new price ranges for the high-grade sector, market players said.

The offering included serial bonds only, priced to yield from 2.70% in 1993 to 5.85% in 2012.

The issue is rated Aaa by Moody's Investors Service, AA-plus by Standard & Poor's Corp., and AAA by Fitch Investors Service.

A syndicate led by Dillon, Read & Co. originally won the Tennessee GOs with a TIC of 5.50%, but the bid was rejected by the issuer, the firm confirmed. A Dillon, Read source said that the issuer declared the bid late.

Dillon's pricing included serial bonds yielding from 2.60% in 1993 to 5.90% in 2012.

In follow-through business, Lehman Brothers reported all bonds sold from a $279 million Georgia GO deal.

Merrill Lynch & Co., senior manager for $35 million Missouri State Water Pollution control GO bonds, reported an unsold balance of $2 million late in the session.

Secondary Market

Sizable blocks of bonds changed hands yesterday, traders said, and bid-wanted flow was heavy. Bond blocks in the $20 million range were not uncommon. For example, market sources said there were $22 million Austin, Tex., 6s, and $21 million New York 5 5/8s of 2003 out for the bid. One market source said that $51 million Triborough Bridge and Tunnel Authority 6 1/4s of 2012, AMBAC-insured, traded right around the 6.18% level.

Meanwhile, short-term market participants said that trading was slow yesterday with yields anywhere from 10 to 20 basis points higher.

"There was a real lack of interest in the market today," said a trader. "We have been on such a hot streak lately, and there was no retail interest at all."

Late in the session, Los Angeles Trans 3 3/4s were quoted at 2.93% bid, 2.90% offered: New York City Tans 3 1/4s were quoted at 2.90% bid, 2.85% offered; San Bernadino Co., Calif., Trans were quoted at 3.15% bid, 3.10% offered; and New York State Trans 3.65s were quoted at 2.83% bid, 2.80% offered.

Negotiated Pricings

Smith Barney, Harris Upham & Co. priced $85 million of Delaware County, Pa., GO bonds.

The offering included serials priced to yield from 3% in 1993 to 5.40% in 2001, and 6.20% in 2022. Zero coupon bonds were priced to yield from 6% in 2002 to 6.45% in 2012.

The issued is rated double-A by Moody's and Standard & Poor's.

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