Municipals bounded higher yesterday only to return some gains by afternoon when the Treasury market headed south.

Overall, municipals ended 3/8 to 1/2 points higher in moderate secondary activity. They had been up 1/2 to 3/4 points, and one municipal trader cited "pretty euphoric buying" earlier in the day.

"The levels are getting pretty steamy," he said.

By about 2:30 p.m., the Treasury market, which had been up as much as 1/2 point, went lower. It ended the session down slightly more than 1/8 point in pre-inflation report positioning. The May producer price index is due out tomorrow at 8:30 a.m.

Municipal participants began to get the feeling that the market was probably nearing the top, making it a good time to sell some bonds, one trader said.

He likened it to the game of musical chairs. No one wants to be caught seatless when the music stops.

One municipal analyst pegged dollar bonds up 3/8 points, overall, while yields on high-grade issues were lower by five basis points.

"The were a lot of bid lists and bid wanteds in," he said, estimating that bid lists totaled $300 million.

In debt futures, the September municipal contract end nearly 1/4 point lower to 93 1/32. Yesterday's September MOB spread was negative 372, compared to negative 376 on Tuesday.

George Friedlander, a managing director at Smith Barney Inc., said that despite the Treasury market's drop yesterday, the June municipal bond contract was donw only two ticks.

Since Friday, the fixed income markets have exhibited a better tone owing to a growing perception that another Fed tightening may not be around the corner. The removes "a lot of the fear and loathing" evidenced recently, Friendlander said.

The market remains in "great technical shape," a trader added. He cited the "huge" bond calls coming up on July 1 and "no bonds around."

In the month of July overall, some $22.5 billion of municipal bonds will exit the market, according to Muniview, the Bond Buyer's municipal database. Those bonds are either maturing or being called.

If that investor cash is looking for municipals,

"There's not much out there," the trader said.

In new issue action yesterday, a PaineWebber group won $200 million Florida Board of Education public education capital outlay bonds with a true interest cost of 5.7426%. Serial bonds were reoffered to investors at yields ranging from 3.30% in 1995 to 5.75% in 2015. A 2019 term, containing $37 million, was priced to yield 5.85%. A 2024 term, containing $60 million, was priced to yield 5.88%. Moody's Investors Service and Standard & Poor's Corp. rate the offering double-A. Late in the day, a $3.765 million balance remained on the deal.

In other news, Standard & Poor's Corp.'s The Blue List rose $34 million on Wednesday to $1.47 billion from $1.43 billion Tuesday.

The 30-day visible supply of municipal bonds for today totals $3.299 billion, down $731.3 million from yesterday. That comprises $1.719 billion of competitive bonds, down $333.5 million from yesterday, and $1.580 billion of negotiated bonds, a decline of $397.8 million from yesterday.

New York, New York

New York bonds have been in short supply these days, but that may change now that the state passed its roughly $34 billion 1995 fiscal budget early yesterday.

The state in April delayed a $400 million New York State Thruway bond deal, slated for sale that month. In an interview then, Claudia Hutton, state budget spokesman, said the transaction would likely take place about four weeks after the budget's completion.

John Clarkson, another state budget spokesman, yesterday said the state has not prepared a schedule of deals yet.

"We don't know when the [Thruway] bonds will be sold," he said. The state, however, plans to sell at least $70 million of general obligation bonds by month's end, he said.

Robert W. Chamberlin, a senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc., said that while Massasachusetts has been hardest hit by the new issue paper drought, New York is not far behind. For New York State and its authorities, last month's new issue sales were down 85.9% when compared to the same period May 1993.

Moody's on California

In credit-related developments yesterday, Moody's Investors Service said it plans to reassess its Aa ratings on California's general obligations following a meeting next week with state budget officials to learn how the state plans to resolve its deteriorating cash position.

Moody's said the ratings reassessment will be made in connection with the release by Gov. Pete Wilson on June 15 of his revised budget for the fiscal year beginning July 1. Wilson has delayed providing final budget numbers because he is waiting to see the results of his request for an unprecedented $3.1 billion of federal aid to help with immigration costs.

The budget, "if enacted as proposed, would fail to address the accumulated deficit, prolonging and increasing the state's reliance on external short-term borrowing," Moody's said in a press release.

"Current estimates of external cash flow borrowing needs under the proposed fiscal 1995 budget are as much as 10 billion, an unprecedented level of borrowing for which the market capacity is untested," Moody's said.

A record-size $6.9 billion short-term borrowing is tentatively scheculed on July 20.

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