Municipals defied signs of economic vigor yesterday as cash climbed 3/4 point and futures bounded up more than 1 1/4 points.

"It's a grab-a-thon, everybody wants bonds," one municipal trader said. "It's amazing how quickly we forget how badly we got burned."

The trader said that while municipals are attractive, to be a buyer one must believe that the current Treasury market levels are going to hold.

"I guess people feel like we're in a trading range in Treasuries and they're not scared of [municipal] supply coming," he said. "As long as we can bounce around [an 8% yield] on the long bond, they'll be comfortable buying bonds."

Yesterday's moderately active session saw yields on high-grade issues improve by seven basis points overall, while dollar bond prices gain 3/4 point to more in spots, one analyst said. While late-day talk had the overall market up as much as a point, the analyst said he doubted that. Participants should take note of Friday's November employment report, he added.

In debt futures, the December municipal contract was up 1 10/32 to 84 1/8. Yesterday's December MOB spread was negative 466, compared with negative 487 on Monday. In the government market, the 30-year bond ended up 11/32 to yield 7.99%.

The municipal trader said that some bonds in the cash market have risen as much as two points in the past two trading sessions. Even bonds subject to the market discount rule, which of late investors have largely shunned, appeared to do well yesterday, he said.

"They are trying to make a silk purse out of those sows' ears," the trader said. "I don't know whether people are buying them ... but they are certainly bidding them up. We'll wait and see how many of them trade."

Robert W. Chamberlin, a senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc., said yesterday's gains came despite an upward revision in third quarter gross domestic product data.

"This a classic example of where the market should be moving south," Chamberlin said.

The Commerce Department yesterday reported that the economy grew at a 3.9% annual rate in the third quarter, faster than the 3.4% gain reported last month. Also yesterday, the Purchasing Management Association of Chicago reported that its Chicagoland Business Barometer increased to 67.4% in November, seasonally adjusted, from 64.3% in October.

However, those displays of economic strength were not powerful enough to derail a growing perception that bonds are a good investment, Chamberlin said.

"A week ago, Dean Witter switched over to 50% bonds in its recommended asset allocation," he said. Previously, the firm's strategist had recommended 50% stocks, 35% bonds, and 15% cash.

"That's like a glowing recommendation," he said.

Chamberlin said that he suspected Dean Witter's recommended asset switch is indicative of what's happening generally, and is a phenomenon that has strengthened over time. Last week, many investors were said to be leaving the stock market for bonds after the Dow Jones Industrial Average fell sharply.

"It's a cumulative effect," Chamberlin said, adding that investors did not become believers overnight. "The bewildering part of this is that it tends to hit on days when there's a much longer list of reasons why the market should go south."

Chamberlin said yesterday's buying was more likely being done by those who will eventually sell bonds to retail rather than retail buyers themselves. However, retail investors will eventually get around to realizing that "when bonds are cheap, that's when you are supposed to buy them, not sell them," he said.

He said that since last February, particularly in October and November, bond funds have been hit by redemptions from retail investors. The puzzling thing is that "the same people who were eager to buy long munis at 5.5% don't want to have anything to do with them at 7%," Chamberlin said.

The analyst noted that Tuesday's general obligation bond deals by Pennsylvania, Georgia, and Vermont owed much of their success to property and casualty company investors.

Unlike bond funds managers whose buying is determined largely by how much money comes into their funds, property and casualty companies match long-term assets to liabilities, and have a freer hand when it comes to investing, Chamberlin said.

On Tuesday, however, property and casualty companies appeared, in some measure at least, to be buying bonds to hold "for sale" because they see an opportunity to sell them later for more money, Chamberlin said.

"These are professional buyers who are in and who sense that the market is going to get better," he said. They apparently believe that current market levels are acceptable, and that prospects are good for reselling at a later date bonds bought now, the analyst said.

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