The trickle-down effect from renewed weakness in the dollar drove government securities lower on Friday, and tax-exempts followed suit.

Bogged down by heavy dealer inventories and a dearth of liquidity, municipal dollar bond prices were quoted down a full point.

Activity in the secondary market was described by participants as "very light" and the tone of the market was called "very heavy."

"Today was an ugly day," one trader said Friday afternoon. "This morning there was a smattering of lists and a Maine note deal that got done pretty well, but it all dropped dead around noon."

After outperforming Treasuries in recent weeks, tax-exempts are destined to underperform government securities for the near term until they cheapen up, the trader said.

On Friday, the September municipal futures contract took a severe beating, closing down 1 3/8 at 89.13, off a high of 90.11 and a low of 89.07.

The September MOB spread was minus-415 Friday, unchanged from Thursday. Meanwhile, the 30-year Treasury bond closed down over 1 1/4 point, at 7.51%.

Ending a string of 10 straight increases, Standard & Poor's Blue List was down $92 million from Thursday's seven-year high of $2.339 at $2.247 billion on Friday.

But dealers were still stuck with swollen inventories in a market bereft of buyers.

"It's awfully lethargic, but it's been like that all week," another market participant said. "We've seen nothing but sellers. The market's got the needle pointed South. Things don't look real constructive."

One factor that could work in the market's favor is the heavy slate of economic indicators scheduled for this week. tomorrow, new home sales for May will be released by the Commerce Department. Wednesday, the second revision of first-quarter gross domestic product will be released. Thursday brings personal income and personal consumption data for May from the Commerce Department. On Friday, the market will see leading indicators and construction spending, also for May.

Left to fend for itself, the municipal market might succumb to the downward momentum, traders said, but the indicators will give it some direction and could provide a lift if they are positive.

"If you can get a string of strong-for-the-market, weak-for-the-economy type numbers, coupled with a more neutral statement from [Federal Reserve Chairman Alan] Greenspan, it could cause a rally for bonds," said the head of one of Wall Street's largest trading desks.

However, if a rally does occur, it will be "short-lived" unless the dollar bounces back, the source said.

But if economists predictions are correct, it does not appear that next week's economic indicators will provide any respite for the beleaguered fixed-income markets.

"In general, the numbers point to continued moderate growth," said Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp. Schaja predicts new home sales will rise 2.5%; a small upward revision in first quarter GDP growth to 3.2%; a 0.5% increase in personal income and a 0.2% jump in spending; a 0.1% rise in leading indicators; and a 0.3% climb in construction spending.

But judging by the dollar's performance last week, currency traders are not convinced that the U.S. economy is gaining strength.

The dollar stabilized last Wednesday and Thursday without government intervention after reaching a 50-year low versus the Japanese yen on Tuesday. But on Friday, the dollar again came under heavy selling pressure against the yen and German mark, despite coordinated central bank intervention.

Theories explaining the dollar's woes range from the strong performance of economies abroad to an overall lack of faith in the Clinton administration.

Questions about Clinton's credibility are not new and some economists dismissed the notion that they are responsible for the dollar's decline.

But at least one veteran muni market player is convinced that Clinton's waffling on a variety of issues, concerns over his personal integrity, and the perception that the administration is in chaos are behind the illiquidity bogging down the fixed-income markets.

"I know cash flow buyers that must buy bonds to offset their taxable liabilities, like property/casualty companies, are sitting on a lot of cash because they don't see any stability or reason to buy," he said. "Would you buy the stock of a major corporation if you didn't have confidence in its CEO or board?"

Whatever the cause, the swoon in the dollar has spurred foreign investors to sell U.S. government securities and other dollar-denominated assets, raising fears that the Federal Reserve will have to tighten once again.

Although the Fed may be loathe to raise interest rates for fear of stalling growth in the U.S. economy, traders are convinced that trend toward higher interest rates will likely continue.

Given that state of affairs, market participants were unable to say what can shake munis out of their current funk.

"With the Blue List being so high, I don't think the dealer community is going to show any leadership. I shudder to think if it was a big calendar," the trading desk head said. "You have to get to a point where you have synthetic MOB traders. If enough of those guys lift the muni contract, the secondary will be perceived as cheap. But it's going to take some sizable players."

On the calendar this week, the negotiated sector features two offerings by the New York Metropolitan Transportation Authority through a syndicate led by CS First Boston: $200 million of transportation facilities revenue bonds and $180 million of commuter facility revenue bonds. In addition, First Chicago Capital Markets will price $90 million of revenue bonds for the Illinois Health Facilities Authority.

In competitive action, the calendar is dominated by $160 million New York State general obligation bonds and $125 million Burke County, Ga. Development Authority revenue bonds.

In late dollar bond trading on Friday, Georgia MEAG AMBAC 6s of 2022 were quoted at 96 1/4-3/4 to yield 6.28%; Los Angeles Wastewater MBIA 5 7/8s of 2024 were at 93 1/2-3/4 to yield 6.35%; and New Jersey EDA PCR MBIA 6.40s of 2032 were 97 1/2-98 to return 6.50%.

The 30-day visible supply of municipal bonds stands at $2.94 billion today, down $296.2 million from Friday.

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