Prices are likely to drop this week in sympathy with a weaker Treasury market, forcing higher yields on some $6.7 billion of scheduled new deals.

Treasury prices sold off nearly one point Friday as the market gave up hopes the Federal Reserve would ease soon.

A senior Fed official was reported to have said the recent sluggishness reflected by U.S. economic data was not convincing enough to ease policy before the presidential election.

The losses came at the end of a tumultuous week for government bonds, one that created considerable uncertainty about near-term price prospects.

Municipals, however, suffered much less volatility as market players stayed on the sidelines and new issuance slowed.

The Bond Buyer's 20-bond index rose a modest two basis points last week, to 6.92%. The 11 bond index also rose two basis points, to 6.20%, while the revenue bond index rose four basis points, to 6.49%.

But the market could heat up this week as issuers test the market with new deals amidst continuing uncertainty about the presidential elections.

"The question is, will the buyers bite?" one trader said. "Deals will come and we'll stumble a bit. It's got to get cheaper, you can't fight a down Treasury market."

Rising Supply

Issuers continue to prepare deals for the market in earnest as rates remain attractive.

But underwriters note that many of the new issues are sensitive to price drops and negative arbitrage, which could stem the tide of deals. A lack of supply could spur investor demand for municipals, they noted.

"We have to meet the market in the intermediate range with the sell-off in Treasuries," said Dennis J. Boyle, managing director of national underwriting at Merrill Lynch & Co. "But the calendar seems fairly manageable and there is plenty of cash available for bonds."

The Bond Buyer calculated 30-day visible supply at $8.26 billion Friday. The 30-day visible supply has not been under $6 billion since Sept. 10 when it was $5.23 billion. Total sales for the week have not been under $3 billion since the week ended Aug. 28, when sales totaled $2.92 billion. Anticipated weekly sales have been over $6 billion for five straight weeks.

This week's competitive slate is dominated by $1.3 billion of California general obligation bonds.

Moody's Investors Service Friday confirmed its Aa rating on the state's debt, which totals $16.9 billion.

Also set for competitive sale is $153 million of Ohio revenue bonds and $83 million of Shelby County, Tenn., various public improvement bonds.

The negotiated sector features $450 million of Massachusetts Water Resources Authority general revenue refunding bonds, to be priced by Goldman, Sachs & Co.: $235 million of Connecticut Housing Finance Authority housing mortgage revenue bonds, to be priced by Fist Boston Corp.; and $177 million of Pennsylvania Housing Finance Agency multifamily housing revenue bonds, to be priced by Bear, Stearns & Co.

On the economic front, the markets will be watching the release of inflation data, which they expect to show low levels.

On Wednesday, the Labor Department reports September's producer price index, followed by the consumer price index report on Thursday.

On Friday, the Federal Reserve releases figures on September industrial production and capacity utilization.

Friday's Market

Municipal bond prices fell 1/4 point on average Friday, but some bonds were 1/2 point lower in sympathy with the one-point drop in the Treasury market.

Secondary activity was light ahead of the weekend, traders said.

In late secondary dollar bond trading, Washington Public Power Supply System 6 1/2s of 2015 were quoted at 98 5/8-7/8, to yield 6.61%; Puerto Rico GO 6s of 2014 were quoted at 94 7/8-95 3/8, to yield 6.44%; and New York City Water 6s of 2017 were quoted at 92 1/2-93, to yield 6.62%. Florida Board of Education 6s of 2025 were quoted at 94 3/4-bid, to yield 6.38%.

Meanwhile, short-term yields rose five to 10 basis points on the day, traders said.

In late trading, Los Angeles tax anticipation notes were quoted at 2.73% bid, 2.65% offered; New Jersey notes were quoted at 2.73% bid, 2.70% offered; and Pennsylvania noted were quoted at 2.73% bid, 2.71% offered. Texas tax and revenue anticipation notes were quoted at 2.70% bid, 2.65%; and Wisconsin notes were quoted at 2.70% bid, 2.65% offered.

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