After absorbing a slew of strong economic data and the effects of a stumbling Treasury market, municipals reflected the weather in New York on Friday: grey, cold, and gloomy.

Tax-exempt prices ended from 1/2 to 1 point lower depending on the sector, while the benchmark 30-year bond closed down 13/32 to yield 7.29%.

Municipal traders reported light trading in the cash market with much of the action dictated by arbitrage accounts.

Arbitrage accounts are generally active when Treasury market prices fluctuate as much as they did at the end of last week, and also at the end of the month as they try to "square up" their positions, one source said.

With most traditional investors watching from the sidelines, arbitrage players sought to take advantage of the gyrations in the Treasury market and the weakening municipal futures market.

The June municipals contract closed down slightly more than a 1/2 point at 90.07, off a high of 90.23 and a low of 90.04.

The municipal contract was stung by the realization that Thursday's losses were not an aberration and tax-exempt prices, which had not dropped as precipitously as Treasuries, "caught up," the trader said.

Municipals plummeted as much as a point during the morning session in sympathy with the Treasury market's dive, which resulted mainly from strong economic indicators and a weakening dollar.

The fixed-income markets rebounded a bit after it became evident that the Federal Reserve Bank was purchasing dollars to help stem the currency's decline versus the yen and deutschemark. While the Fed's move stopped the bleeding, the damage had been done and the markets were unable to recoup all the lost ground.

By mid-afternoon on Friday, the morning's volatility had subsided and most tax-exempt players were content to sit tight and look ahead toward this week, albeit with reservations.

"Rather than a leaden feel, it's a tentative tone," one veteran municipal market participant said. "We've stopped going down like a herd of turtles but it's difficult to get anyone to do anything. It's very quiet."

~I'm afraid we're in a bear market. We had a respite before Nixon's funeral, but now we've resumed it," he said. "Even though the economy isn't accelerating at the pace of the fourth quarter, it's going up enough that people are concerned that rates will have to rise."

The market was hit with a host of economic reports Friday that seemed to confirm those suspicions.

The Commerce Department said that personal income grew 0.6% in March after climbing 1.8% in February, which was revised from 1.3% originally. Personal spending was up 0.4% after a 1.3% rise in March, revised from 1.0%. The upward revisions of the February figures offset any relief traders might have taken from the March numbers, which were in line with expectations.

Commerce also reported that sales of new single-family homes jumped 11% in March - well above the expected 7.9% increase - to a seasonally adjusted annual rate of 739,000. Elsewhere, the Chicago National Association of Purchasing Managers index increased to 67.6% in April from 66.5% in March, rise that was a bit stronger than expectations.

After the Chicago NAPM numbers were released bids "ran for the hills," one trader said at mid-day. "The market immediately traded off about one point before gradually grinding up about a half."

Both future primary supply and dealer inventories moved higher on Friday. The Bond Buyer's 30-day visible supply rose $280 million to $4.55 billion from $4.27 billion on Thursday. Most of the gain came in the negotiated sector, which increased $227 million to $2.83 billion on Friday from $2.6 billion.

Standard & Poor's Corp.'s The Blue List jumped $158 million on Friday, to $1.69 billion from $1.53 billion. The measure of dealer inventories has not been that high since April 6, when it was $1.72 billion.

Sales of long-term bonds for the week ended April 29 totaled $3.14 billion, down from $3.56 billion in the previous week. Negotiated sales totaled $2.26 billion, down from $2.62 billion a week earlier. Competitively bid issues totaled $878 million versus $938 million.

Anticipated sales for this week are $3.16 billion, of which $2.47 billion are negotiated.

Heading up the new deals this week is a $200 million competitive offering of improvement tax revenue anticipation notes by the District of Columbia, slated for tomorrow.

Sometimes this week, Orange County, Fla, expects to sell $190 million of MBIA-insured revenue and refunding revenue bonds through a syndicate led by Goldman, Sachs, & Co.

"The calendar is light and we'll get some statistics. With any kind of luck at all we should be able to sustain somewhere around [Friday's] levels," one trader said.

However, the near-term outlook for the market does not look promising. Beleaguered traders continue to focus only on the inflationary economic data and remain convinced that another tightening will occur sometime around the May 17 Fed Open Market Commitee meeting.

Beyond that, some economists have predicted that yields on the 30-year Treasury will be hit 8.00% by the end of summer, which one municipal player called "a distinct possibility."

Still, the fixed-income markets face a crossroads this week, with Treasuries liable to move up or down depending on the outcome of trade and currency market fluctuations. A weak dollar hurts the Treasury market, making U.S. securities less valuable to foreign investors.

This morning, the National Association of Purchasing Managers will release its April index. The index was 56.7% in March. Carol Stone, senior economist at Nomura Securities International, predicts the April index will come in at about 56.5%.

"We're looking at manufacturing activity that continues to be quite firm," Stone said. "I wouldn't think the [government] market would do much if the index doesn't change much from prior months' level, but a pickup of more that a couple of points would push the market further down."

A bigger concern, she said, is that the market is faced with the difficult challenge of digesting a "mixed bag" of economic data. As a result, the Treasury market could revisit the low points of late March.

"We have a string of uncertainties in various areas and now with a weakening dollar we have a new element the market's paying attention to," Stone said. "I think over all it would be hard to feel comfortable making a commitment at this point as an investor."

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