After a morning of idleness and negativity, the municipal market parlayed the Treasury market's stability into slight gains in the afternoon, only to give back much of the advance.

Prices ended the day mixed in thin trading with market sources reporting dollar bonds unchanged and long-term high grade bonds closing up 1/4 to 3/8 of a point.

Thanks to a five-year treasury note auction that went slightly better than expected and a second straight day of declining commodities prices, the benchmark 30-year Treasury bond closed up more than 1/2 point, to yield 7.34%. The Commodities Research Bureau's index ended down almost three points at 231.87 on the heels of a 3 1/2 point drop on Tuesday.

Bolstered by the afternoon Treasury market rally, the June municipal futures contract closed up 1/4 point at 91 26/32, off a high of 95 5/32 and a low of 91.

The gains belied the definitively negative tone that characterized the market early in the day.

With traders citing a "vacation sentiment" ahead of the upcoming holiday weekend, limited supply, losses in the 30-year Treasury bond, and wariness over the five-year auction, municipal market participants were content to tread water in the morning session as prices fell as much as 1/2 point in some sectors.

"You never know what's around the bend but right now everyone is content to sit tight," one trader said during the morning session. "The three-day weekend coming up is a reason to wind down. The,market needs it and so do the participants."

Skepticism about the five-year note auction prevented the market from immediately capitalizing on weaker-than-expected economic indicators released yesterday morning.

The fixed-income market continues its recent trend of ignoring all anti-inflationary data and focusing instead on anything that could be negative for bonds. Once the Federal Reserved delivered its much anticipated 50-basis-point increases in the federal funds rate and the discount rate on May 17, some sources predicted an end to the bear market that has plagued the tax-exempt arena since February. But traders and market observers were quick to point out that a sustained rally is probably not forth-coming.

"Technically, it looks like we're destined to go down and test the old wits within the next few weeks," one trader said. "People are willing to buy bonds, but I wouldn't be surprised to see [prices] drift back down."

Robert W. Chamberlin, senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc., said the market is really "feeling the pinch" from a lack of supply.

"The market generally thrives on volume because people have choices," Chamberlin said. "Now, the volume isn't there, [which] doesn't generate the activity or interest. We've got ourselves in sort of a funk that doesn't [want to] let go."

The Bond Buyer's 30-day visible supply fell $27.8 million yesterday and now stands at $3.61 billion. The measure of future supply has now been under $5 billion for ten straight days.

Standard & Poor's Corp.'s The Blue List rose $52 million on Wednesday, to $1.62 billion from $1.57 billion, the third consecutive increase in the measure of dealer inventories.

Further analyzing the market's continued sluggishness, Chamberlin noted that "even the most astute professional traders are going to be little gun shy" following substantial losses absorbed by most players in recent months. Also, the tax-exempt market is hampered by the continued stranglehold that hedge players have on the Treasury market, he said.

Today and tomorrow are expected to be quiet ahead of the three day weekend. Next week also promises to be slow as market players await next Friday's employment report.

In competitive action yesterday, Lehman Brothers was the apparent winner of a $158.1 million Fairfax County, Va. issue bidding a total interest cost of 5.5580%.

Serial bonds were priced with yields ranging from 3.50% in 1995 to 5.90% in 2014.

Lehman Brothers priced serial bonds in the long end of the offering 10 basis points through the triple-A level reached on Tuesday and still garnered solid demand, according to market participants. However, an analyst pointed out that Virginia triple-A paper usually trades 5 points through the scale.

The unlimited tax public improvement bonds carry triple-A ratings from both Moody's Investors Service and Standard & Poor's Corp.

Late in the day, Lehman Brothers officials reported an unsold balance of $16.595 million.

In late dollar bond trading, Georgia MEAG AMBAC-insured 6s of 2022 were quoted at 96 3/4-lock to yield 6.25%; Rhode Island Housing 6 3/4s of 2017 were quoted at par 1/8-5/8 to yield 6.7%; MBIA-insured Orange County, Fla. 6s of 2024 were 97 1/2-bid none to yield 6.18%, Illinois Housing Development Association 6 3/4s of 2023 were quoted 99 3/4-1/4 to yield 6.77%; and MBIA-insured University of California 6 3/8s of 2024 were 99 5/8-bid none to yield 6.4%.

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