Municipals erased morning losses yesterday to finish 1/4 to 3/8 points higher than on Wednesday.

The advance came in lockstep with Treasuries, one trader said.

The Treasury market's 30-year bond closed up 3/8 points to yield 7.23% yesterday, gaining strength from the dollar's rise against the Japanese yen on what appeared to be progress in trade talks.

In the municipal market, dollar bonds closed up 1/4 point overall. Yields on top quality high-grade bonds were lower by two basis points, while yields on remaining high-grade issues fell five basis points through the intermediate range. Secondary activity was moderate.

"I think with the Fed's 50-basis-point move [it] has put the market on firmer footing," a municipal trader said. He added that while some bid lists were seen during the morning, they appeared to be well received.

Another trader said some of yesterday's cash market gains were municipal futures contract-driven. The contract had been up about 3/4 point at about 2:30 p.m., but closed up 11/32 to 92 7/32 yesterday. Yesterday's June MOB spread was negative 414, compared to negative 419 on Wednesday.

"The contract is very rich right now," he said, adding that it had gotten 1 1/2 points rich relative to the cash index. That scenario is likely to be continued in today's market.

"We would expect to see some arb buying [in the cash market] and contract selling [today]," the trader said.

Moving to the buy side, two players interviewed yesterday had put themselves firmly into a holding pattern.

"We're not buying much of anything," said Richard J. Moynihan, president of Dreyfus Municipal Funds, which has roughly $24 billion of long-term municipal bonds under management. "We are treading water so to speak."

While current redemptions have not been any greater than the usual daily average, cash from retail inventors has not been flowing into his funds, Moynihan said.

"We are constructive on the market," Moynihan said, but added that he's hampered by the lack of retail cash flow.

Moynihan said the Federal Reserve's raising of two key rates Tuesday helped to eliminate some uncertainty, and should help keep long-term rates from moving higher. "I think it does clear the air a little," he said.

While it's still too early to see much of an effect, the move should restore enough stability to draw more retail investors into municipal bond funds, Moynihan said.

The market does offer some "enticing," opportunities, and Dreyfus does participate occasionally, he said.

From a coupon standpoint, housing bonds are offer good value at present. Moynihan said he believes that the best total return at this point will come from higher coupons rather than capital gains.

Frank Lucibella, a second vice president at John Hancock Mutual Funds, who manages roughly $750 million of bonds in two municipal funds, also is not much of a buyer these days.

"We're just sitting tight right now," Lucibella said, adding he's waiting for the market to provide some direction. "It feels like we're sort of in no man's land right now," he said.

While the Fed's action removed a lot of uncertainty, at least for the short run, concern has now shifted to how the dollar behaves against the Japanese yen, and to the Commodities Research Bureau's index, which has run up sharply of late, he said.

As for good opportunities, Lucibella said it is hard to determine which parts of the market are undervalued because it is difficult to fix value on the overall market.

One sector that still appears to be experiencing some difficulty is discount bonds, Lucibella said. Those bonds are running into trouble because some participants are unsure how to value them following enactment of a 1993 Federal tax law.

"Especially short discount bonds are really being hurt by the de minimis rules," he said.

Elsewhere, Standard & Poor's Corp's The Blue List sank about $50 million yesterday, to $1.52 billion from $1.57 billion. This week, the measure of dealer inventories has dropped $440 million to the lowest level since April 26 when it was $1.50 billion.

The 30-day visible supply of municipal bonds for today totals $3,784.8 million, up $76.6 million from yesterday. That comprises $6,183.2 million of competitive bonds, down $1 million from yesterday, and $2,601.6 million of negotiated bonds, which is up $77.6 million from yesterday.

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