New York City's $1.4 billion competitive note sale today should reap the benefits of strong g market conditions and improvement in the city's short-term cash position to produce yields that range at or below 3%, traders and city finance officials said yesterday.

The offering comes as the municipal market experiences one of its strongest rallies in recent years. Interest rates are hovering at attractive levels throughout the credit markets.

The Bond Buyer general obligation note index registered a yield of 3.04% yesterday, down 16 basis points from last week's level. Additionally, the yield matches the index's lowest level, set Jan. 15, 1992.

City officials have billed the note borrowing as the first and only cash flow borrowing for the 1993 fiscal year, which begins July 1. The issuance consists of $700 million of tax anticipation notes and $700 million of revenue anticipation notes.

At the moment, municipal traders expect the tax anticipation notes to yield close to 2.70%, while the revenue anticipation notes should sell somewhere close to 3%.

Recently, demand for short-term paper has been strong, as investors are eager to buy paper in anticipation of large cash inflows from July 1 bond calls.

On Tuesday, for example, California sold $475 million of double-A rated revenue anticipation warrants in the competitive sector and garnered a 1.45% reoffering yield for the 30-day paper. Market players had expected yields to go only as low as 2.25%.

But while the city's cash position appears stronger than ever, as does the market for short-term notes, some municipal bond traders said the offering may face some obstacles.

Several traders said note buyers could turn picky if rates go too low. "Buyers are acting like they're invested," said one market source, "and the Street is heavier than it may want to admit."

Still, other factors should support a more optimistic turn of events when the city comes to market.

City finance officials scheduled the closing of the note deal on July 2, to coincide with the flood of new cash that is expected to be available after July 1, when over $8 billion of municipal bonds will be redeemed.

City officials also tailored the April 14, 1993, maturity of the Tans to benefit money-market mutual funds, which traditionally experience a withdrawal of cash during the April 15 tax deadline for states and the federal government. The June 30, 1993, maturity of the Rans was established to coincide with state aid payments.

Another factor that should contribute to the deal's success is the relative dearth of New York-based sellers in the market, making the city a scarce commodity among the state's municipal bond funds and money-market mutual funds, which specialize in short-term paper, dealers said.

But the particular condition of the city's short-term financial status has also spurred interest in the issue, observers of city bonds say.

On Tuesday, Moody's Investors Service upgraded the Rans to its highest rating, to MIG-1 from MIG-2. The rating action was significant because the Rans, which are secured by state and federal aid to the city, are the most credit sensitive of the city's short-term borrowings. Moody's cited improvement in the city's short-term cash position as the main reason for the action.

Moody's also rated the Tans, which are secured by property tax revenues, MIG-1. Standard & Poor's Corp. rates the Tans SP-1-plus, the agency's highest short-term rating, and the Rans SP-1. Fitch Investors Service rated both Tans and Rans F1-plus, its highest short-term grade.

"The interest rates throughout the short-term municipal market haven't been lower in years," said one investment baker, who specializes in New York credits. "At the same time, problems with the city's credit have really faded into the woodwork."

Philip R. Michael, the city's budget director, said finance officials began planning for the note issue last year.

City finance officials sold $2.25 billion in short-term securities in fiscal year 1992, which ends June 30, under the shadow of delayed state aid payments and heightened concerns about the quality of New York City as a municipal credit.

As a result, Mr. Michael said, finance officials took steps to force city agencies to cut spending. At the same time, the city's budget office began to make conservative estimates on the collection of tax revenues, he added.

The confluence of these factors helped produce a 1992 fiscal year budget surplus of more than $455 million.

City financial officials used the surplus to balance their 1993 fiscal year budget and eliminate their planned use of transitional financing, saving the city from a near-certain downgrade by Standard & Poor's, which rates the city GOs A-minus, with a negative outlook. Moody's rates the securities Baa1.

In past years, the thorny issue of the state budget has hurt the city's cash position.

In fact, the late passage of the state's 1992 fiscal year budget forced the city to brave the credit markets during unfavorable times, as was the case in late April 1991, when the city sold $1.25 billion in revenue anticipation notes to cover expenses while waiting for state aid.

But this time, state lawmakers passed the fiscal 1993 budget on time, which made state aid available to municipalities much quicker. In addition, the full effects of the state's Local Government Assistance Corp. have begun to bolster the city's cash position. The LGAC was established by the Legislature in 1990 to speed up state aid to municipalities.

In March 1993, the city is projected to receive from the corporation $997 million more in state education aid than it would have before the corporation was established, according to the city's Office of Management and Budget. The city receives between $6.2 billion and $6.4 billion in state aid, according to Standard & Poor's.

Before the LGAC's enactment, the state made almost half of those payments any time between May and June. With the LGAC, the state is expected to make a growing portion of those May to June payments in March, when the city traditionally experiences a cash flow shortage. For its part, Moody's cited the growth in the LGAC's March contribution to the city as a reason for its Ran upgrade.

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